China is continuing its clampdown on over $1 trillion in opaque investments that are being funneled through riskier borrowers, such as developers, despite being advertised by banks as low risk and high yield, reported Bloomberg.
According to highly-anticipated rules published on Friday, banks and wealth managers are no longer able to use money invested in cash management products to secure long-term debt or bonds rated below AA+. By the end of next year, an estimated RMB 2.5 trillion ($390.5 billion) of the products will become non-compliant, needing to be replaced with lower-yielding, high quality investments.
While the regulatory tightening was flagged 17 months back, China’s lenders have continued to make riskier investments. It is anticipated that we will see a reduction in such investments as returns decline, shrinking the market by 10% and denting bank revenues.
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