China challenges banks to develop new products

But urges them to minimize risks.

Shang Fulin, chairman of China Banking Regulatory Commission, said CBRC will encourage financial innovation while making certain banks don't remain on the hook for risks they have supposedly transferred off-balance-sheet.

He also said banks should earn fee income on wealth management products but should not also earn investment income or assume credit risk from off-balance-sheet assets.

"Some off-balance-sheet innovative business lines have gotten inter-tangled with (on-balance-sheet) deposit and lending business," he said.

"We need to segregate lending, wealth management, brokerage, and securities investment businesses, implementing protective barriers around each, while encouraging innovation within each segment."

Chinese banks are notorious for making deals with non-bank institutions such as trust companies and securities brokerages to transfer some loans off balance sheet while remaining exposed to the underlying risk.

Last May, regulators issued new rules preventing banks from trading between separate on- and off-balance sheet accounts.