PBOC closes WMP loophole

Loophole used by non-bank financial institutions to hide WMP risks.

The People’s Bank of China, the central bank, said the new restrictions are an extension of a similar policy applied to commercial banks that prohibits a practice called “fund pooling.” This involves trading bonds between a bank’s own proprietary accounts and the wealth management products (WMPs) they manage for clients.

Investment managers can deliver promised payouts to WMP investors by shifting bonds back and forth between their own balance sheets and the WMP accounts they manage for clients even if the underlying bonds have not yet matured or have fallen in value.

WMPs offered by Chinese banks grew 56% in 2012 to US$1.16 trillion, which was equivalent to 7.6% of the system's total deposits at the end of the year.

Economists said China has tolerated the large growth in the sector because WMPs deliver higher yields to ordinary investors, serving as a backdoor way to liberalize interest rates and increasing the need to consume.

Banks, non-financial institutions such as brokerages, insurers, trusts and fund management companies have leapt to meet investor demand for WMPs, and many banks have allowed non-bank firms to sell their WMPs through bank sales counters.