China’s crackdown on shadow banking is taking aim at more than $1 trillion of opaque investments sold by banks as low risk and high yield, even while funds were channeled to riskier borrowers such as developers.
Banks and wealth mangers can no longer use money invested in so-called cash management products to buy long-term debt or bonds rated below AA+, according to long-awaited rules published on Friday. An estimated 2.5 trillion yuan ($390.5 billion) of the products are currently invested in assets that will soon become non-compliant, and need to be swapped for lower-yielding, high quality investments by the end of next year.
While the regulatory tightening was flagged 17 months back, China’s lenders have continued to make riskier investments with some of the hundreds of billions of dollars that have flowed into the products, which offer higher rates than deposits and money market funds. Those flows should now be tempered as returns decline, shrinking the market by 10% and denting bank revenues, according to CSC Financial Co. analysts. Shares of China’s property developers, which count cash management products as a funding source, slumped on the news.