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China to count off-balance sheet financing in assessing banks' risk

Headquarter building of the People's Bank of China.
Zhang Peng | LightRocket | Getty Images

China's central bank will take into account off-balance sheet financing at commercial banks to assess their overall financial health, three sources with direct knowledge of the matter said late on Tuesday.

The People's Bank of China will make the change to its so-called Macro Prudential Assessment (MPA) risk-tool to broaden its regulatory oversight to include wealth management products often sold by banks and not counted on their balance sheets, the sources told Reuters.

The MPA assessment framework already included checks of loans, bond investments, equity investments and buybacks of financial assets sold, and deposits at non-financial institutions.

The move marks another step in the PBOC's efforts to control rising leverage in the nation's financial system and underscored worries among analysts that unsustainable credit could hit an already slowing economy hard.

The sources said the latest adjustment to the MPA system, first introduced to examine banks' capital adequacy ratios, will create additional restrictions to curb rising debt levels in the country's financial system.

Zhou Hao, senior emerging market economist at Commerzbank in Singapore, wrote in a note that the new rules would require banks to reserve more capital.

How are Chinese banks holding up?

"This is part of the 'risk control' policy package as the shadow banking activities have picked up strongly due to monetary easing," Zhou wrote, adding that Chinese authorities have also become wary of a property bubble.

Reuters wasn't immediately able to obtain a response from the central bank.

In recent weeks, the PBOC has also reintroduced the use of longer tenor, more expensive reverse repo operations in the money market in what traders and analysts have said is an effort to reduce dependence on cheap overnight borrowing and curb leverage in the bond market.

Money raised through the sale of off-balance sheet wealth management products is known to be a key source of funds for the bond market.

One source said the latest change to the risk-measuring tool hasn't as yet come into effect as the central bank was still gauging the amount of money that would be affected.

The news appeared to push bond yields up. China's benchmark 10-year government bonds yields opened up by 3bps on Wednesday morning and was trading at 2.732 percent as of 0316 GMT, compared with previous close of 2.717 percent.

The central bank introduced the macro-prudential regime at the beginning of this year. The new assessment system has also been used to monitor banks' pricing of interest rates to prevent them from engaging in "vicious competition".

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