MNI INTERVIEW: WMPs To Shrink as China Targets Shadow Banking

--PBOC May Increase Credit Quotas On Debt Concerns: Govt Advisor

--New Rules On WMPs May Yet Prove Moderate To Help Diffuse Risks

     BEIJING (MNI) - As Chinese regulators tighten the squeeze on the financial

industry in its widening deleveraging campaign, the once booming wealth

management sector will likely shrink this year, Zeng Gang, head of the banking

research institute at the Chinese Academy of Social Sciences, told MNI in an

exclusive interview.

     "New rules on asset management sector prohibited banks from guaranteeing

fixed returns for WMPs and block investment in non-standard products, which will

largely shrink the sector," noted Zeng, a well-known government advisor on

banking and macro economic policy.

     Both issuance of and returns on new wealth management products (WMPs) will

plunge, as the regulatory push significantly constrains banks' abilities to

conduct off-balance-sheet financial transactions through the so-called shadow

banking, said Zeng.

     Back in April, the People's Bank of China published the long-awaited new

rule targeting asset management sector, which is scheduled to kick-in after

2020.

     --OUTSTANDING WMPS

     According to statistics published by the People's Bank of China (PBOC),

outstanding WMPs expanded to about CNY30 trillion as of the end of 2017,

including CNY22.2 trillion outside banks' books widely seen as invested in

shadow banking. That just about matched the market capitalization of all shares

traded on the Shanghai Stock Market at the end of 2017.

     The regulators will release further rules in detail soon, Zeng said. The

implementation may however be moderate as authorities are aware that a sudden

clampdown may lead to risks of default, given the large pile of debt built up

rapidly and recently.

     However, the process is necessary to correct distortions in market rates

generated by low risk and high returns on WMPs, Zeng said.

     China's ambitious deleveraging campaign has entered a third year, leading

to a sharp slowdown in M2 and total social finance growth. As of the end of

March this year, TSF stood at CNY5.58 trillion, CNY1.33 trillion less than the

same period last year. M2 stood at a record low at 8.2% in March

     --Credit Concern

     "Companies which have expanded debt in a period of loosening credit and low

rates without risks assessment will pay the price under the current environment

of tightening credit," Zeng said. "The government is targeting the inefficient

leverage in the real economy, particularly in state-owned companies and local

government funding vehicles," he said.

     As of May 4, there had been 19 bond defaults this year, 19% more than the

same period last year, Wind Information data showed. In total, 16 short-term

bond offerings, valued at CNY63.94 billion, had to be cancelled or postponed

under the pressure of tight credit.

     "While debt risks of some big listed companies are of concern, in general,

there is no systemic risk," Zeng said.

     In practice, regulators will adjust policies to ease the impact of the new

rules on borrowers, Zeng said.

     --MORE CREDIT QUOTAS

     "The central bank may grant more credit quotas to banks under its

macro-prudential assessment scheme this year, which would boost new loans," Zeng

said.

     New lending by commercial banks in the first quarter plunged to CNY4.86

trillion from CNY13.53 trillion in the previous three months, although it was

still higher than the CNY4.61 trillion seen in the first three months of 2017.

     In addition, Zeng expected the enforcement of new rules on AMPs, mostly

WMPs, to be flexible and conditional on the types of investments.

     "Products invested in local government financing vehicles (LGFV) are

difficult to be repaid, particularly those invested in social welfare projects,

so by the end of 2020, they may largely be allowed to roll over," he said.

--MNI Beijing Bureau; +86 (10) 8532 5998; email: marissa.wang@marketnews.com

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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