China’s banking regulator has requested lenders to cease promoting funding merchandise linked to commodities futures to mom-and-pop patrons, three folks with information of the matter informed Reuters, to curb funding losses amid unstable commodity costs.
It has additionally requested lenders to utterly unwind their present books for these merchandise, which they manufacture and promote to particular person buyers, stated the sources, who’re concerned in and have been briefed on the choice.
The China Banking and Insurance coverage Regulatory Fee’s (CBIRC’s) order to exit these merchandise has not been reported earlier than. It issued the order this yr, two of the sources stated.
“The chance contained in banks’ commodity-linked investments can’t be simply noticed by atypical buyers, neither can they bear it,” one of many sources stated. “Banks additionally don’t have sufficient experience to run such merchandise correctly.”
The sources spoke on situation of anonymity because the directive isn’t but public. The CBIRC, China’s prime banking watchdog, didn’t instantly reply to a Reuters electronic mail searching for feedback.
The transfer comes as runaway commodity costs in each onshore and offshore markets have raised regulatory issues concerning the dangers of speculative bets, prompting China’s state planner and exchanges in current weeks to take price-control measures https://www.reuters.com/article/us-china-commodities-idUSKCN2D60A2.
The CBIRC needs to forestall losses like that incurred a yr in the past by Financial institution of China (BoC) on crude-oil linked funding merchandise, the folks added.
It has requested lenders, together with Industrial and Business Financial institution of China (ICBC), to report “clean-up progress” on commodities-linked funding merchandise on a month-to-month foundation to regulators, two of the sources stated.
The CBIRC has, nonetheless, not given a selected deadline to the banks for utterly exiting their positions, they added.
The ICBC didn’t instantly reply to a request for remark.
Whereas the entire dimension of such merchandise within the Chinese language banking system is unknown, BoC’s $1.eight billion losses tied to simply U.S. crude futures highlights the attractiveness of comparable merchandise for retail buyers searching for increased returns.
FULL SECTOR CLEAN UP
Regulators are fearful mom-and-pop buyers might get burnt once more by the current massive swings in commodity costs, pushed by post-pandemic demand restoration, liquidity easing and speculative buying and selling. Authorities watchdogs have urged Chinese language industrial steel companies to take care of market order.
BoC’s losses final yr had worn out a number of 1000’s of such small accounts held by retail buyers, starting from faculty college students to retired employees, prompting the CBIRC on the time to ask business banks to halt new gross sales of a variety of funding merchandise linked to commodity futures.
Given the current value volatility, the ban on new gross sales has been widened to a full sector clean-up, protecting merchandise linked to commodities not particularly focused earlier than, comparable to gold, silver, platinum, palladium, pure fuel and soy beans, the three sources stated.
Costs of most of those commodities have spiked in current months, whereas futures costs for iron ore and corn on the Dalian Commodity Change in addition to metal and copper on the Shanghai Futures Change have all hit file highs this yr.
Some banks are contemplating methods to shift a part of their present commodity-linked investments and purchasers to affiliated brokerages, however that may want a nod from the securities regulator, one of many sources stated.
Whereas banks’ derivative-like merchandise have flaws in design and threat management, analysts say a harsh sector-wide clean-up means a serious setback in China’s plans to open up the market.
Regardless of repeated vows to ramp up monetary derivatives, Shanghai Futures Change has already halted collaboration with banks on the launch of recent spinoff merchandise within the wake of BoC’s losses, two separate sources informed Reuters.