China scolds banks on wealth management rush

China's bank regulator has censured some banks for trying to lure deposits by selling high-yielding wealth management products, and is ordering them to account for such sales on their balance sheets, two industry sources said on Tuesday.

China's booming wealth management sector has in the last year grown into a way for banks to beat Beijing's lending restrictions, a focal point of China's monetary policy.

In an "urgent meeting" that the China Banking Regulatory Commission called with commercial bankers, the regulator warned banks against trying to skirt lending curbs by expanding their deposit bases.

"Big banks did not get much criticism, but small- and medium-sized banks were criticised," one of the sources said.

"Banks were asked to reorder their wealth management businesses, with the thrust of change aimed at accounting for sales of wealth management products on their balance sheets," the source said.

By selling wealth management products that offer investors annual returns of up to 7.5-8% - more than double the one-year deposit rate of 3.25% - banks want to attract more deposits to support loan growth.

Given proceeds from sales of wealth management products have also funded new loans in the past, but were not reflected on banks' balance sheets, banks have managed to hide some of their lending activities.

"With bank lending strictly limited, there are strong incentives for banks to find ways to get around loan quotas," said Mark Williams, an economist with Capital Economics in London.

"It's a never-ending battle that the government is fighting. But you get the impression that they are winning more battles than they are losing at the moment."

The bank regulator was not immediately available for comment.

Chinese banks are barred from lending more than 75% of the amount they hold in deposits, so to lend more they need to increase their deposits.

Since Beijing checks on banks at the end of each quarter to ensure they are sticking to the required loan-to-deposit ratio, banks are stepping up their drive to attract more deposits before the next round of review after June 30.

China wants to curtail bank lending as part of its bid to cool inflation, which ran at an annual pace of 5.5% in May.

Chinese banks are hemmed in by government regulation. To protect banks' net interest margins, Beijing sets a ceiling on deposit rates and a floor on lending rates that banks can exceed by up to four times. This gives banks a guaranteed margin of some 300 basis points.