Exclusive: China bars banks from selling commodities-linked products to
retail buyers - sources
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[May 26, 2021] BEIJING
(Reuters) - China's banking regulator has asked lenders to stop selling
investment products linked to commodities futures to mom-and-pop buyers,
three people with knowledge of the matter told Reuters, to curb
investment losses amid volatile commodity prices.
It has also asked lenders to completely unwind their existing books for
these products, which they manufacture and sell to individual investors,
said the sources, who are involved in and have been briefed on the
decision.
The China Banking and Insurance Regulatory Commission's (CBIRC's) order
to exit these products has not been reported before. It issued the order
this year, two of the sources said.
"The risk contained in banks' commodity-linked investments cannot be
easily spotted by ordinary investors, neither can they bear it," one of
the sources said. "Banks also don't have enough expertise to run such
products properly."
The sources spoke on condition of anonymity as the directive is not yet
public. The CBIRC, China's top banking watchdog, did not immediately
reply to a Reuters email seeking comments.
The move comes as runaway commodity prices in both onshore and offshore
markets have raised regulatory concerns about the risks of speculative
bets, prompting China's state planner and exchanges in recent weeks to
take price-control measures https://www.reuters.com/article/us-china-commodities-idUSKCN2D60A2.
The CBIRC wants to prevent losses like that incurred a year ago by Bank
of China (BoC) on crude-oil linked investment products, the people
added.
It has asked lenders, including Industrial and Commercial Bank of China
(ICBC), to report "clean-up progress" on commodities-linked investment
products on a monthly basis to regulators, two of the sources said.
The CBIRC has, however, not given a specific deadline to the banks for
completely exiting their positions, they added.
The ICBC did not immediately reply to a request for comment.
While the total size of such products in the Chinese banking system is
unknown, BoC's $1.8 billion losses tied to just U.S. crude futures
highlights the attractiveness of similar products for retail investors
looking for higher returns.
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An employee monitors
molten iron being poured into a container at a steel plant in Hefei,
Anhui province September 9, 2013. REUTERS/Stringer
FULL SECTOR CLEAN UP
Regulators are worried mom-and-pop investors may get burnt again by the recent
big swings in commodity prices, driven by post-pandemic demand recovery,
liquidity easing and speculative trading. Government watchdogs have urged
Chinese industrial metal firms to maintain market order.
BoC's losses last year had wiped out several thousands of such small accounts
held by retail investors, ranging from college students to retired workers,
prompting the CBIRC at the time to ask commercial banks to halt new sales of a
wide range of investment products linked to commodity futures.
Given the recent price volatility, the ban on new sales has been widened to a
full sector clean-up, covering products linked to commodities not specifically
targeted before, such as gold, silver, platinum, palladium, natural gas and soy
beans, the three sources said.
Prices of most of these commodities have spiked in recent months, while futures
prices for iron ore and corn on the Dalian Commodity Exchange as well as steel
and copper on the Shanghai Futures Exchange have all hit record highs this year.
Some banks are considering ways to shift part of their existing commodity-linked
investments and clients to affiliated brokerages, but that will need a nod from
the securities regulator, one of the sources said.
While banks' derivative-like products have flaws in design and risk control,
analysts say a harsh sector-wide clean-up means a major setback in China's plans
to open up the market.
Despite repeated vows to ramp up financial derivatives, Shanghai Futures
Exchange has already halted collaboration with banks on the launch of new
derivative products in the wake of BoC's losses, two separate sources told
Reuters.
($1 = 6.3921 Chinese yuan)
(Reporting by Cheng Leng, Ryan Woo, and Shanghai Newsroom; Editing by Sumeet
Chatterjee and Himani Sarkar)
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