SHANGHAI (BLOOMBERG) - China's push to rein in financial risks is rippling through the economy, with regulators targeting everything from corporate acquisitions to returns on the savings products banks sell to yield-hungry consumers.
On Tuesday (July 18), Bloomberg reported that the banking regulator had told lenders to lower interest rates on wealth-management products, a popular vehicle for domestic savers, after yields in the US$4 trillion (S$5.5 trillion) industry jumped in past months. Officials also extended their campaign against risky overseas acquisitions, with conglomerate Dalian Wanda Group coming under scrutiny after a deals spree.
The two developments dovetail with the theme of the past weekend's top-level financial conference in Beijing: As President Xi Jinping prepares for a twice-a-decade leadership transition this fall, authorities will take a dim view of anything that clashes with their efforts to contain risks in the financial sector. The central bank will take a lead role in administering a cabinet-level regulatory committee that was unveiled at the conference.
"The message from the leadership last weekend was very clear - financial stability is now regarded as an important element of national security," said Raymond Yeung, the Hong Kong-based chief economist at Australia & New Zealand Banking Group.
An editorial in the Communist Party's People Daily newspaper on Monday pointed to the seriousness of the campaign, warning of potential "gray rhinos" - a variation on the black swan events popularised during the global financial crisis, with the difference that the danger from a charging rhino is more immediate and the animals are less rare.
China's latest moves take aim at two forces that have shaped the nation's financial landscape in past years. First, the flow of hundreds of billions of dollars into wealth-management products that carry implicit guarantees; secondly, the unprecedented global takeover binge by Chinese companies - a spree in which billionaire Wang Jianlin's Wanda was one of the top players.
Some Chinese lenders received an order from the China Banking Regulatory Commission earlier this month to lower their rates on WMPs, according to people familiar with the matter. The requirement applies to on-balance sheet WMPs, which account for only about a fifth of the total market, according to one of the people, who asked not to be identified as the matter is not public.
Meanwhile, China plans to punish Wanda for breaching the nation's restrictions on overseas investments in six of its deals by cutting off funding and denying necessary regulatory approvals, according to people familiar with the matter. The Wanda clampdown may also have entangled Sunac China Holdings, which last week said it would buy hotels and theme parks from Wanda for more than US$9 billion in China's largest ever property deal. Banks are reviewing Sunac's credit risk, according to local media reports.
Another high-profile target is Anbang Insurance Group, whose chairman was detained last month after a three-year overseas buying binge that included the acquisition of New York's iconic Waldorf Astoria hotel.
Investors are clearly worried that more companies will be affected, said Hao Hong, a Hong Kong-based strategist with Bocom International. "In this environment, with so much behind the curtain, you would never know what will hit you," he added.
China's overseas deals have fallen sharply in response to the official campaign - the value of Chinese outbound acquisitions in the first half of the year fell 54 per cent to US$66.4 billion from the same period in 2016, according to data compiled by Bloomberg.
Lenders had pushed WMP yields to a 17-month high earlier this summer in an effort to offset a funding squeeze caused by China's campaign against leverage. Though they are not backing off from the anti-leverage campaign, which is part of the wider effort to curtail risk, Chinese regulators are keen to curb the recent explosive growth in WMP funding. They are also concerned that some banks may be passing on the higher funding costs to their borrowers, potentially threatening economic growth and stoking inflation.
China "is reluctant to close the taps for funding in the economy through risky off-balance sheet products, but as a compromise is 'asking' banks to lower the interest rates on them", said Andrew Collier, an independent analyst in Hong Kong and former president of Bank of China International USA. "It is another clever way to try to reduce risk in the economy without shutting off credit."
Yields on some WMPs are well above the nation's benchmark one-year deposit rate of 1.5 per cent, which explains why they have become so popular with savers and an increasing source of liquidity for the banks - especially for the smaller and medium-sized lenders which have been most exposed to this year's funding squeeze.
Amid the scramble for funding, the average returns on WMPs climbed to a 17-month high of 4.66 per cent at the end of June, according to data from Chengdu-based PY Standard.
"The regulators' aim is for banks to start investing in lower-yield, safer investments, partially removing the risky element," said Jonas Short, who heads the Beijing office of Sun Hung Kai Financial. "For funding costs, this is likely to affect small and medium-sized banks, as they rely on WMP issuance for deposits, more so than the large deposit-taking banks."
Industrial & Commercial Bank of China, the nation's largest lender, pledged to closely monitor its on- and off- balance sheet exposures. The bank will fend off potential risks from shadow banking by making asset management and interbank operations "simple, transparent and controllable", ICBC said in a statement late on Tuesday.
The CBRC did not immediately respond to a request for comment.
Indeed, share prices of China's smaller banks fell sharply on Tuesday after news of the CBRC order. China Merchants Bank Co fell as much as 4.3 per cent in Shanghai, before closing down 2.4 per cent, while Chongqing Rural Commercial Bank Co closed down 4.1 per cent in Hong Kong.
Despite the reaction, some analysts think China is still shying away from tackling the real areas of risk, especially the bad loans which are weighing down state-owned companies and their lenders.
"Beijing is concerned about the build-up of financial risks but they continue to take a 'shuffling the deck chairs' approach," said Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen. "Addressing financial risks will require slowing the growth target, writing down assets and imposing investor losses, none of which they seem willing to do."
One danger is that the campaign could get out of hand and trigger a larger problem in China's financial sector, as savers pull their money out of WMPs and an important source of bank funding shrivels, said Michael Every, head of financial markets research at Rabobank Group in Hong Kong.
"It looks incredibly dangerous to me," Every said. "WMPs offer rates that are unsustainable, true. But by reducing those rates, if people don't choose to put cash into them, then the whole pyramid topples over."