Increased scrutiny as investors diversify

Assets under management by trust funds in particular marked record increases from 950 billion yuan in 2007 to 7.5 trillion yuan in 2012, the Credit Suisse report noted.

Hiddy He and Chunling Wen, analysts with Fitch Ratings, said in February the large off-balance-sheet activities and rapidly expanding transactions with non-banking institutions are risky.

Non-loan credit, by the end of 2012, comprised one-third of total credit outstanding in the financial sector, up from 15 percent in 2006, according to the rating agency's statistics.

Fitch Ratings reacted by downgrading the viability ratings of three banks one notch each - China CITIC Bank, Ping An Bank and Industrial Bank.

Compared with big State-owned banks, their medium-sized counterparts in China have a lower ability to pay their annualized returns although they are more aggressive in terms of selling WMPs, said a report by Fitch Ratings released on March 21.

The ratings agency said as banks stocks see slowing growth in yields, banks listed on exchanges will have greater capital pressure in 2013 and 2014.

In a circular released in March, the China Banking Regulatory Commission requested Chinese banks to separate their self-issued, asset pool-based WMPs from other products.

The commission's request, if implemented, would help improve transparency and reduce the liquidity and credit risks of the off-balance sheet products, according to a Barclays Research report.

Banks that are unable to meet the regulators' requirements by the end of April may face penalties and may be banned by the regulator from issuing more WMPs.

Barclays China economist Jian Chang said the government will strengthen regulatory oversight of such activities but will not tighten the sector dramatically. May Yan, Barclays China banks analyst, expects a limited impact because most of the large banks have already finished the process.

In Shanghai, regulators are pushing banks to scrutinize their staff and operational processes to rule out any possibility and scope for illegal sales of unauthorized WMPs.

A whistleblowers' telephone hotline was launched in Shanghai in February in an effort to clamp down on banking operations that breach regulations. The China Banking Regulatory Commission Shanghai Supervision Bureau said that as many as 74 banks as well as the city's Banking Association had signed up to the service.

Banks in Shanghai have been introducing increasing numbers of WMPs over the past year. They have attracted balances of around 7 trillion yuan, the commission said in a statement.

About 14 percent of China's wealth products were sold in Shanghai in 2012, but commission officials said cases of illicit operations, including selling unauthorized products, had been identified and that it was critical to strengthen effective management over financial institutions.

Investors said they need WMPs to hedge against the increasing consumer price index.

"The yield from wealth management products is higher than the deposit interest rate," said Wan Xiaodi, a 62-year-old retired teacher in Shanghai.

"I hope banks can give us more information and, if possible, a lecture or book to tell us the details of any product they promote. Without sufficient knowledge it is difficult to tell what we are really buying," said Wan.