China moves to regulate entrusted loans

China's top banking regulator on Saturday issued rules to tighten management over entrusted loans, a form of business-to-business lending that involves commercial lenders as intermediaries.

Under the new rules, as intermediaries, commercial banks should neither participate in the decision-making of entrusted lending nor provide guarantees of any kind, according to the China Banking Regulatory Commission (CBRC).

The entrusting parties should choose qualified borrowers independently, and they should bear the credit risk from entrusted lending.

The rules also tightened supervision on funding sources, which ask commercial banks to stay away from entrusted loans that use bank credit, funds with special purposes and other forms of borrowed capital as funding sources, as well as loans with unproven funding sources.

Meanwhile, entrusted loans should not be used in production, operation or investment in government-banned sectors, and they are also prohibited from investments such as bonds, futures, financial derivatives and asset management products.

The entrusted loan business has grown fast and played a positive role in serving the real economy, but there are "certain hidden risks" due to a lack of unified rules, the CBRC said in a statement.

Commercial banks should strictly separate entrusted loan business from their own business to enhance risk control and business management, said the regulator.

Entrusted loans have played a major role in China's shadow banking, which takes place outside the regulatory scope and remains a key source of risk to financial stability following years of rapid growth.

Following a tough financial clean-up in 2017, China will continue to crack down on irregular and illegal activity in the financial sector this year to forestall risks, according to the annual Central Economic Work Conference last month.