PBOC warns on wealth management

China should reorganize its wealth management industry as it is unduly raising funding costs and encouraging savers to behave like gamblers by chasing after lucrative short-term returns, a deputy governor of China's central bank said on Saturday.

In an unusually sharp criticism of the rapidly growing wealth management business, Liu Shiyu said the sector has pushed up funding costs for Chinese companies, causing credit to be unpalatably expensive and distorting the economy.

"This type of practice where water is added at every layer and prices are raised in an exploitative way at every link directly increases costs in the real economy," Liu told a forum on Saturday at Beijing's Tsinghua University.

"There is no contribution to labor productivity and it will lead a nation, it will lead a country's financial system into short-term behavior that is extreme in its gambling mentality."

Liu said that wealth managers were lending money to companies at rates of around 14 percent, but often offering rates of only around 8 percent to individuals investing in their funds.

Fueled by savers' and companies' thirst for higher returns, China's wealth management sector has exploded in recent years.

Standard Chartered Bank estimated in January the industry now manages around 11 trillion yuan ($1.8 trillion) and is growing at an annual rate of 65 percent.

However, while wealth management products have rocketed in popularity, the opaque nature of the sector has fed concerns about the industry's health.

Liu warned in his speech that non-financial companies were increasingly becoming involved in the wealth management industry, lured by the attractive returns on offer.

"This outcome is a very terrible outcome," he said.

With China's economy stuttering and growth expected to grind to a 24-year low of 7.3 percent this year, there are growing concerns about the level of risk associated with the country's financial sector.

Banks' nonperforming loan ratios have edged up to a two-year high, though they are still at a modest 1 percent. The country also experienced its first-ever default of a publicly traded domestic bond in March.

Acknowledging the buildup in financial risks, Liu said China's money supply as a percentage of its GDP was high, and it would be better if the ratio were lower.

However, he said there is no economic theory showing that a bigger ratio is concomitant with a higher level of risk.

China's M2 money supply - made up of cash and bank deposits - was worth 188 percent of its GDP between 2009-2013, World Bank data showed, over two times that of the US' 88 percent.