BEIJING--Some high-risk investment products should be allowed to
fail in an orderly way, the People's Bank of China said Tuesday in
its annual Financial Stability Report.
Investors need to be aware of the risks of "wealth management
products" and can't assume a cast-iron guarantee, the central bank
said, with defaults allowed to happen "naturally."
Wealth management products, often sold to customers through
Chinese banks, offer higher returns than traditional deposits but
are widely considered a safe bet by retail investors. While many
are invested in bonds and other relatively safe financial
instruments, some are repackaged as loans to riskier borrowers.
The PBOC also emphasized the need to control risks stemming from
off-balance-sheet lending by banks.
The central bank said online financial products should be kept
under regulatory supervision and need to be subject to capital
constraints. Since last year, Chinese Internet companies such as
Tencent Holdings Ltd. and an affiliate of Alibaba Group Holding
Ltd. have started offering deposit-like services, which have been
highly popular with investors, though they remain lightly
regulated.
The development of Internet finance will help push forward
interest rate liberalization but shouldn't raise funding costs for
borrowers in the real economy, the PBOC said.
The central bank repeated previous pledges to push ahead with
financial reforms that include a liberalization of interest rates.
The central bank still keeps a ceiling on deposit rates in the
state-dominated banking system.
The PBOC also said it would improve regulation ahead of the
introduction of privately run banks. Virtually all China's existing
financial institutions are majority state-owned.
One key objective of financial reform is to reduce the room for
underground lending, which has thrived because of the failure of
banks to meet the needs for credit from many smaller private
businesses.
The PBOC report also used particularly harsh words to describe
the virtual currency bitcoin, calling it a "tool for
speculation."
The central bank also said it carried out stress tests on 17
major banks based on financial information from the end of 2013,
and found the banking system's ability to withstand shocks
"relatively strong."
The tests, however, showed the need to pay attention to risks
from the property sector, wealth management products and local
government debt, according to the central bank.
Local government debt, another class of lending sometimes
thought to carry an implicit guarantee from the central government,
should be resolved through "market means," the PBOC said.
China's local governments have borrowed heavily in recent years,
partly to fund needed infrastructure projects but also for use on
riskier real-estate investments. There have been increasing
concerns about the ability of some of these local governments to
repay their debts.
Banks should strictly control lending to industries with excess
capacity problems, the report said. Although it didn't list the
sectors explicitly, these areas of the economy generally include
metals, cement and chemicals.
The central bank also said it would seek to reduce regulatory
arbitrage, or the opportunity to take advantage of loopholes in the
regulatory system.
Richard Silk and Grace Zhu