China regulator drafts rules aimed at tightening grip on shadow banking

SHANGHAI (Reuters) - China's banking regulator is preparing rules aimed at making commercial lenders get a tight grip over their off-balance sheet financing activities, the latest move by authorities to try to rein in shadow banking.

The government has been trying to control off-balance sheet lending, which has jumped since 2010. It is worried that funds are being used to roll over bad loans as well as to worsen asset-price bubbles in real estate and create industrial overcapacity.

Under the draft rules, published on the regulator's website on Wednesday, banks will need to "comprehensively" supervise risks stemming from financing activities though securities firms, insurers and trust companies in the form of entrusted loans or wealth management products (WMP).

Banks will also need to apply the same risk control practices for each of their subsidiaries, the draft rules said.

Off-balance sheet assets will need to be categorised by levels of risk and capital cost, they added.

Chen Xingyu, a Shanghai-based banks analyst at Phillip Securities Research, said the rules should lead to higher standards for trust products and WMPs.

The China Banking Regulatory Commission is seeking opinions on the new rules.

Shadow banking may involve up to 27 trillion yuan ($4.39 trillion) of assets, which would be equivalent to one-fifth of the country's formal banking sector, according to a report by the Chinese Academy of Social Sciences.

In March, China's central bank pledged to improve its monitoring of shadow banking as part of an effort to make its data on bank credit and interest rates more accurate.

In April, China issued tougher guidelines governing trust companies, forbidding the operation of fund pools that enable them to fund cash payouts on maturing products with the proceeds from WMPs.

(Reporting by Engen Tham, Shanghai Newsroom and Samuel Shen; Editing by Kazunori Takada and Richard Borsuk)