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China regulator launches fresh shadow banking crackdown 

July 29, 2016

Gabriel Wildau, Financial Times

China is preparing rules to tackle risks from shadow finance by curbing the issuance and portfolio mix of “wealth management products” that have fuelled the huge increase in Chinese corporate debt since 2008.

WMPs, which allow banks to channel credit to local governments, property developers and overcapacity industries struggling to access normal bank loans, have surged from Rmb1.7tn ($255bn) at the end of 2009 to Rmb23.5tn ($3.53tn) by the end of last year, according to Wind Information. 

By recording WMPs off-balance-sheet, or by classifying them as “investments” rather than loans, banks are able to report higher capital adequacy ratios and set aside less provisions against bad loans.

The China Banking Regulatory Commission has drafted rules that would limit the size of lenders’ WMP issuance based on their total balance sheet or deposits, 21st Century Business Herald reported this week. The draft rules also restrict the share of equities and so-called “non-standard” assets — mainly illiquid loans — within a single WMP. If adopted, the change would force WMPs to rely more on bonds and money-market assets, which are less risky but offer lower yields. Read more

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