Chinese regulator slams banks over leveraged products

China could clamp down still further on its derivatives markets unless banks start selling more cautiously, a senior regulator has warned.

Li Fuan, head of the innovation department at the China Banking Regulatory Commission (CBRC) based in Beijing, warned banks to conduct sufficient research to understand their clients’ needs and avoid selling them products above their risk-bearing capacity, if they want the development of a derivatives products market in the country to continue. 

The warning came after the authorities moved last month to suspend the foreign exchange margin trading services that commercial banks offered to retail customers. Many investors had suffered large losses, in part due to highly leveraged margin trades.

Market sources say leading banks such as Bank of China, China Minsheng Bank and Bank of Communications had offered leverage of up to 50 times to some retail customers. The three banks declined to comment.

Banks were apparently motivated to offer high leverage to attract foreign exchange deposits from customers – especially linked to the US dollar – as a lack of onshore US dollar deposits meant they could in turn lend out hard currency at high rates of up to 200 basis points above one-month Libor.

“There are more and more wealth management and derivatives products that inherently have high volatility,” Li was quoted saying at a public forum by a local newspaper. “For the Chinese market, you can find takers for any level of risks and customer segments that are looking for higher return on the back of these higher levels of risks.”

He added that, because banks had recruited staff and installed sophisticated systems, they could “immediately offer these products”. “[Banks should] conduct tests on clients’ risk appetite and inform them on the risks involved in the products,” Li said.

According to local Chinese press, CBRC officials hinted at restricting the market in May, when one official was quoted in a public forum as saying that “the level of risk management capability of banks today is still not up to the demand for operating foreign exchange margin trading business”. 

Such margin trading services were largely sold to retail investors and market participants say the latest move could foreshadow tighter regulatory controls over other innovative products targeted at retail customers.