Jan 07, 2014 05:15 PM

Trust Companies, Wealth Managers Banned from Investing Pooled Money

(Beijing) – Trust companies and wealth management plans cannot pool investor money to make investments, the China Banking Regulatory Commission (CBRC) said on January 6, indicating renewed efforts at reining in the shadow banking system.

Trust companies and wealth managers cannot maintain a "capital pool," which typically forms when funds collected from investors of different trust products or wealth management plans are kept together to provide capital for investments or covering the repayment of maturing debt, the CBRC said in a meeting that sets priorities for this year's regulatory work.

That means the losses and gains of each trust and wealth management product need to be accounted for separately, permitting investors to track the flow and return of their money.

Over the past several years, the CBRC has taken several measures requiring the lenders to phase out "capital pools," if they had any, so the risk of wealth management products can be monitored and better controlled.

Banks were enticed to run a capital pool in part because it allows them to write loans that would not show up in normal lending records. That way they could lend more than permitted by regulatory restraints. One limit caps lending at 75 percent of total ordinary deposits for most banks.

Trust companies and securities firms were known to help banks channel funds through off-balance-sheet operations to areas such as property development which otherwise could not get bank loans.

Critics of the operations, represented by the chairman of the Bank of China, Xiao Gang, have called the pooling of investor capital through wealth plans an example of shadow banking and even a Ponzi scheme.

The CBRC also said at the meeting it would work in cooperation with other central government departments to develop a unified regulatory framework for small-loan companies that cater to the financing needs of small and family businesses. It also said loan guarantee companies must not take on too much leverage.

The meeting echoed the theme of a document released recently by the General Office of the State Council, the country's cabinet.

The document urged that more regulatory attention be paid to supervising and controlling shadow banking, which it defined as either credit intermediaries without financial business licenses or professional institutions and financial products under weak regulation.

The former includes small-loan lenders, guarantee companies and third-party wealth management agencies, and the latter includes money market funds that are becoming increasingly accessible to ordinary people, the document says.

Some experts have argued that the definition is too narrow. Last year, a report by the Chinese Academy of Social Sciences said the shadow banking sector had reached 20.5 trillion yuan in 2012, or 40 percent of the country's GDP that year. The official figures were 14.6 trillion yuan and 29 percent of the GDP.

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