Exclusive - Chinese regulator asks banks to cut wealth management yields - sources

By Zheng Li and Nathaniel Taplin

SHANGHAI/BEIJING (Reuters) - China's banking regulator and main bond clearinghouse have asked commercial banks to reduce rates they offer on high-yielding wealth management products, five sources told Reuters, an apparent back-pedalling on commitments to let markets price credit.

The beneficiaries of such a cut could be companies struggling with punishing debt loads as China's economy slows, who have often had to turn to the wealth management product (WMP) sector for funds, but at a cost of double-digit interest rates for capital borrowed for relatively short periods.

The move to suppress returns on the WMPs would both reduce the cost of capital for such firms, many of which are simply rolling over debt to stay afloat, and reduce their appeal to retail investors considering selling out of Chinese stock markets, which have had a turbulent start to 2016.

The sources said the regulator and clearinghouse did not specify any particular class of WMP in its guidance but wanted to lower yields across the board to control the scale of assets in this investment space.

The high level of indebtedness is of growing concern as Chinese policymakers try to bolster economic growth and financial stability at a time of high volatility in its currency and share markes.

Reuters reported on Tuesday that new non-performing loans (NPL) held by Chinese banks more than doubled in 2015 from the previous year.

WMPs, marketed by banks but often backed by third-party loans or other risky assets, continue to offer interest rates of up to 10 percent or higher, even though domestic benchmark rates and bond yields have fallen sharply over the past year.

But in such a weak domestic economic environment, analysts have raised concerns that many of the assets underlying such products may be of poor quality, shifting default risks onto retail investors and directing more credit to low-quality firms.

Third-party data from CN Benefit, an independent research firm that tracks the wealth-management sector, found that WMPs were increasingly backed by bond and money market instruments in the second half of 2015, even as bond defaults have accelerated sharply over the past year.

Moreover, a recent Reuters analysis of exchange data found that a disproportionate percentage of new bond listings on the Shanghai exchange were issued by local government investment or infrastructure firms, a major source of China's existing nonperforming debt problem.

Nonetheless with stocks swooning, the real estate market still vulnerable and high-rated bond prices bid up to multi-year highs, WMPs are one of the few options left for domestic investors seeking high returns.

Retail investors also often assume that banks will stand behind such products, even when marketing materials indicate that they are not guaranteed.

The China Banking Regulatory Commission could not be reached for comment, while the Central Depository and Clearing Corporation declined to immediately comment.

(Additional reporting by Zhao Hongmei and Clark Li in BEIJING; Editing by Will Waterman)