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Announcement:

Moody's: CBRC proposals on banks' wealth-management products credit positive

 The document has been translated in other languages

04 Aug 2016

Hong Kong, August 04, 2016 -- Moody's Investors Service says that proposed tighter rules in China for regulating wealth-management products and related services provided by the commercial banks would -- if implemented -- be credit positive for Chinese banks.

"These measures -- which were reported by Bloomberg on 27 July as originating from the China Banking Regulatory Commission (CBRC) -- are part of the CBRC's effort to strengthen regulations for shadow banking products and would be credit positive for Chinese banks because they would address key risks stemming from the rapid growth of such products," says Yulia Wan, a Moody's Assistant Vice President and Analyst.

"On a product level, these risks include indiscriminant sales of wealth-management products that invest in high-risk asset classes, such as equities, non-standard debt instruments and derivatives," says Wan.

Moody's conclusions were contained in a recently-released report, "Banks - China: Chinese Proposal to Regulate Banks' Wealth-Management Products Is Credit Positive".

Specifically, the report notes that the proposals include the introduction of capital and reserve buffers and tighter rules regarding underlying investments. The capital buffers should not constrain most banks, given that RMB5 billion is not a high capital threshold, and the reserve requirements should add to their ability to absorb contingent liabilities. Separately, the rules on underlying investments should split the market into low-risk and high-risk segments.

The report further notes that the banks also face the risk of losses from their own investments in wealth-management products packaged by other banks, and from the contingent liabilities they could incur from their sales of these products to avoid reputational risk, or to compensate for losses related to indiscriminant or misleading sales practices.

More broadly, wealth-management products carry the risk that these instruments will become a burden on bank liquidity and a front for under-supervised financing activities.

Wealth-management products in the past have been predominately sold to retail investors through bank retail channels and have higher yields than bank deposits.

At the same time, Moody's says that the authorities must be mindful that the curbs on wealth management products do not trigger defaults. Some products fund high-risk industries and companies. If those companies cannot get financing via such products because of stringent regulations, defaults are likely to rise.

According to the China Banking Wealth Management Registration System, of the RMB23.5 trillion of outstanding wealth-management product balance at the end of 2015, RMB3.72 trillion was related to non-standard debt instruments, which usually are created to circumvent regulators' loan quotas or made to certain high-risk sectors and companies.

Moreover, a growing proportion of wealth-management products are acquired by other banks, which provides a new channel for the transmission of shocks in China's banking system.

If a tightening of regulations causes products to fail to refinance because fewer investors are eligible to buy them, and if sponsoring banks refinance them to pay former investors at maturity to avoid reputational risks, banks will face liquidity challenges that will add to the potential of system disruption.

Subscribers can access the full report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1037029

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Christine Kuo
Senior Vice President
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Minyan Liu
Associate Managing Director
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

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