China Central Bank Moves to Limit Risk in Interbank Market

China Central Bank Moves to Limit Risk in Interbank Market

LINGLING WEI

Feb. 13, 2014 4:14 a.m. ET

BEIJING—China’s central bank is taking steps to rein in certain bond-trading activities that could amplify risks in one of the world’s fastest-growing debt markets.

A division of the People’s Bank of China on Thursday published new rules effectively banning banks from using the funds raised from the sale of high-yield investment products for proprietary trading, or trading for its own profit, according to a statement posted on the website of the China Foreign Exchange Trade System, the interbank-trading and foreign-exchange division of the central bank.

The rule focuses on a kind of investment involving what are known as wealth-management products. Central bank officials are especially worried that banks could take funds raised from the sale of such high-yield investment products and invest them in the interbank bond market, where banks lend to each other to meet their daily needs. The new rules forbid the practice.

Regulators worry that the practice has allowed banks to hide risks in their trading books, led to illicit personal gains by individual traders and caused bond-price distortions, officials have said. The Wall Street Journal reported in April that the PBOC was investigating the interbank bond market with an aim to curb such transactions.

Wealth-management products are typically short-term investments that banks market as a high-yield alternative to bank deposits, which offer low rates due to government rules. About half of the funds raised are invested in low-risk assets such as government and corporate bonds and money-market products, according to research firm Cnbenefit. But many others are tied to everything from loans to developers to accounts receivable to valuables such as gold and jewels. Regulators worry that such details often aren’t disclosed by investors.

Issuance of wealth-management products has expanded rapidly in recent years. Fitch Ratings estimates the total value of outstanding products at around 13 trillion yuan ($2.2 trillion) at the end of 2012, compared with 8.5 trillion yuan at the end of 2011, according to the most recent available data.

The central bank’s latest move—which follows other regulatory actions aimed at cutting risks in China’s financial system—represents further evidence that authorities are taking seriously the country’s mounting debt load, especially funds raised outside the traditional banking channels.

Much of the new debt comes from sources outside the usual remit of regulators, or was arranged in such a way as to obscure the actions. In addition, analysts say, a full-scale crackdown would further hinder the country’s already-slowing economic growth.

The cleanup efforts come as Chinese companies are raising money in the domestic bond market at a record pace, as Beijing is seeking to reduce the economy’s reliance on bank lending and to build a competitive market that would require companies to borrow at different rates, depending on their credit quality.

China’s bond market, totaling more than $4 trillion in debt outstanding, is second only to Japan’s in Asia. But until recently, it has mainly served as a vehicle for the central government to help fund the construction of airports, highways and other infrastructure projects. State-owned banks and enterprises also account for a big portion of bond issuers.