source from：wsj
MARKETS
China Regulator Warns Banks Away From Speculative Activity
CBRC tells lenders to conduct reviews of certain practices viewed as risky to China’s economy

By Shen Hong
Updated April 11, 2017 2:07 a.m. ET
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SHANGHAI—China is taking another step to contain the growing risk in its financial system, warning banks against engaging in speculative activity that has created unhealthy asset bubbles and prevented money from flowing into a weak real economy.

In a document titled Directive 46 circulated to banks Monday and reviewed by The Wall Street Journal, the China Banking Regulatory Commission asked them to conduct self-checks of certain actions it described as “irregularities,” including making leveraged investments via wealth management products and the use of new financial instruments such as negotiable certificates of deposits. The regulator said its local branches would also launch spot checks of banks under their jurisdiction.

Without offering details, the regulator warned of “severe penalties” for banks found to have committed serious violations of the new guidelines.


Since last year, Beijing has grown increasingly wary of a fast-rising debt pile among companies and local governments, as well as periodic investment booms in markets ranging from bonds to sugar. Making the prevention of financial risk and reduction of leverage top priorities this year, authorities have stepped up their efforts in recent months, especially in the money market where the central bank has raised key short-term interest rates twice since late January.

In its latest directive, which runs seven pages, and a nine-page list of guidelines, the CBRC warned banks against using regulatory loopholes, idle funds and insider trading to profit from various forms of arbitrage.

In addition to voicing longstanding concerns about banks using financial products to remove bad loans from their balance sheets, the CRBC specifically defined the use of wealth management products to make leveraged bets in financial markets as an irregular activity.

Over the past decade, wealth management products have become prevalent in China’s shadow banking sector, which includes nonbank lenders. These short-term products traditionally offer investment returns much higher than bank deposits. Because the products are typically invested in long-term assets such as bonds, the issuers are faced with periodic needs to secure funds to repay investors. This has contributed to increasingly frequent cash crunches in China’s financial system, such as one late last month when short-term interbank funding costs rose to two-year highs.

In the directive, the CBRC also asked banks to conduct self-checks of whether they have asked nonbank institutions such as brokerages and private-equity firms to “add further leverage, duration and risk” in their investments. It also warned banks against investing their own wealth management products in those issued by others.

The latest clampdown also focuses on negotiable certificates of deposits, a popular new financial tool Chinese banks use to replenish capital but also add leverage. These bondlike instruments allow banks to borrow money typically for less than a year.

The CBRC instructed banks to disclose whether they have used large issuances of NCDs to finance various forms of speculative investment that intensify “latent liquidity risk.”

The regulator said its campaign was aimed at “guiding the banking sector back to its roots” and ensuring that funds are “invested into the real economy.” It warned against behavior it described as “working without bending down” and “sitting there collecting free money.”

The CBRC asked banks to submit a report on their self-checks by June 12 and to complete them by the end of November.