The China Banking Regulatory Commission banned banks frombuying so-called credit beneficiary rights in its latest effort to crack downon shadow banking, The Wall StreetJournal's China Real Time blog reported May 6, citing bankers and analysts.
In a directive issued in the week of April 25, the regulatorbanned banks from using funds from their own wealth management products to buycredit beneficiary rights, which grant a buyer the right to a stream of incomefrom a certain product, such as a corporate loan, a wealth management productor a margin financing deal. The buyer, however, will not own those products.
The seller will then be able to turn those underlying assetsinto "investment receivable," which requires lesser provisions thanactual loans. Banks may also implore other methods and side arrangements,called drawer arrangements, to further disguise the loans from their balancesheets, creating a more complex dealing structure and hiding nonperformingloans from regulators.
In addition, the regulator instructed banks to provideadequate provisions for their underlying assets, even if they no longer appearon their books.
The regulator did not respond to the Journal's request for comment and the directive has not beenreleased to the public.