Wealth management products' yield 'not guaranteed'

Tiny quotas under pilot program

The project will not allow banks to assign an expected return to a product, common in wealth management investments, and one reason they were seen as guaranteed.

Unlike wealth management products, they will also be forced to regularly publish a net asset value to reinforce the idea that returns are based on the performance of the asset, not the creditworthiness of the bank.

Detailed rules have not been released, but bankers said they expected them to require banks to clearly identify the underlying assets of a product.

The rise of the wealth management industry has led to increasingly complex investments. In many products, the underlying asset was often an opaque trust fund or brokerage product, providing little clarity on the identity of the ultimate borrower.

The assets in a wealth management product were also often a package of loans from the bank selling the product to investors. It would collect a portion of the interest income from the loans, blurring the lines between on-and off-balance sheet assets.

Banks also often provided guarantees - sometimes informally - to their trust and brokerage partners, promising to compensate the third party for losses or to repurchase credit assets at a future date.

Indeed, the nasty cash crunch that roiled China's interbank lending market in late June, was due in part to banks' need for cash to fund payouts on maturing wealth management products that were supposedly off-balance-sheet.

CBRC Chairman Shang Fulin said recently that China's wealth management industry needed to move towards a pure asset-management model in which the bank connects borrowers with investors - collecting a management fee in the process - but plays no role in guaranteeing returns or sharing income from the assets they manage.

Under the pilot program, banks will be required to strictly segregate on- and off-balance sheet funds.

While regulators want a business model akin to mutual funds to become the norm for banks' wealth management business, the initial size of the new pilot is tiny.

Most of the 11 lenders will receive initial quotas between 500 million and 1 billion yuan ($82 million to $163 million), though a few may get larger quotas, the bankers said. That compares to 9.08 trillion yuan in bank wealth management products outstanding at the end of June, CBRC figures show.

The other banks included in the pilot project are: China Merchants Bank, Minsheng Bank, Everbright Bank, CITIC Bank, Ping An Bank, Shanghai Pudong Development Bank, Industrial Bank, and China Bohai Bank.