China’s banking regulator has taken further steps to tighten its oversight of wealth management products by asking banks to register these products before selling them to the public

July 12, 2013, 7:42 a.m. ET

China Orders Banks to Register Wealth Management Products

China’s banking regulator tightens supervision over fast-growing segment

BEIJING—China’s banking regulator has taken further steps to tighten its oversight of wealth management products by asking banks to register these products before selling them to the public, according to a document seen by The Wall Street Journal on Friday.

The new rule would give the regulator increased information on these high-yield products, though it could slow the speed at which they come to market, a local banker who received the document said.The China Banking Regulatory Commission in the document recently asked Chinese commercial banks to provide detailed information of each wealth management product on a newly set up electronic platform 10 working days before they begin selling the product to the public.

The new rule, which is now in effect, will help boost transparency of the products, which are a popular alternative to traditional bank deposits, offering higher returns but also entailing increased risk.

Regulators have been trying to tighten supervision over this fast-growing segment, particularly after the default late last year of a 140 million yuan ($22.8 million) wealth management product sold through a Shanghai branch of Huaxia Bank Co.600015.SH -3.46% Investors were eventually repaid their principal but not the promised interest of 11% to 13%.

The banking regulator has teamed up with the China Government Securities Depository Trust & Clearing Co., a state-run bond clearing agency, to set up the registration platform, according to the notice. Banks need to submit detailed information on each product, including product maturity and an indication which projects will use the funds.

Banks need to wait until they receive a registration number issued through the electronic platform before formal sales can begin, the notice said.

“The new measure could help improve transparency of wealth management products and allow regulators a better understanding of the market. But it will reduce bank efficiency in issuing wealth management products,” said a local banker, who declined to be named.

Banks that fail or delay the submission of data or misstate information could be barred from selling wealth management products, the notice said.

By the end of July, banks must also submit the same information on all wealth management products issued after Jan. 1, 2011, the regulator said.

Wealth management products issued by Chinese banks grew from nearly nothing two years ago to 7.1 trillion yuan last year, according to official data. A lack of information on many of the products and the rapid growth of this business have prompted concerns over possible risks to the country’s financial sector.

To rein in this segment of the market, China’s bank regulator in late March asked banks to cap the size of so-called “nonstandard” wealth management products—those that are invested in assets that aren’t traded on an open market.

Any wealth management product that has more than 80% of its funds invested in such “nonstandard assets” must be classified as “nonstandard.” Banks already have to meet a requirement that their “nonstandard” products not exceed 35% of their outstanding wealth management products or 4% of their total assets by the end of this year.