China Limits Bank’s Off Balance Sheet Investments

China’s central bank published rules on Thursday governing investment by wealth management products (WMPs) in the country’s bond market, in a move aimed at containing risks posed by banks’ off-balance-sheet business.

WMPs are short-term investment products that banks market to customers as higher-yielding alternatives to traditional deposits.

In principle, banks simply manage WMP assets on behalf of clients, with the client, not the bank, exposed to losses if the assets decline in value. But analysts warn that China’s banks’ are increasingly exposed to the loans, bonds and other off-balance-sheet assets underlying WMPs.

That is due in part to the maturity mismatch between short-dated WMPs and longer-dated bonds and the loans that underlie them. This mismatch often forces banks to use their own funds to make cash payouts on maturing WMPs when the underlying assets have not yet matured.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza