Hampered by the stringent regulations on loan and wealth management, commercial banks are circumventing the rules by floating private banking arms and teaming up with trusts to grow business.

The banking regulator last month imposed tighter loan controls and curbs on wealth management products to prevent capital flowing into alternative channels like the stock market.

In May, domestic and foreign banks in China launched more than 4,100 wealth management products, with a total investment capacity of 700 billion yuan, according to China Banking Regulatory Commission.

The banking watchdog said in early July that commercial lenders could not deploy wealth management funds in secondary market stocks, securities-backed funds, equities of unlisted companies and non-publicly traded shares of listed companies.

The curbs, however, give banks a strong motivation to develop their private banking business, which is not subject to the new rules.

Private banks, which usually sell wealth management products to affluent people and institutions - a group that can endure higher risk and expects to gain higher returns, enjoy a much more flexible investment principle.

"We invest a portion of the clients' funds in equity and the quantum usually depends on individual risk appetite," Wang Jing, executive deputy manager of China Merchants Bank's private banking department, told China Daily.

Investors are also expecting to reap a fortune after the growth enterprise board (GEB) commences operations later this year. Anticipating this, commercial banks like China Construction Bank and Industrial Bank are planning to launch investment products targeting GEB-listed stocks.

Bank of Communications, the nation's fifth largest lender, recently floated a five-year equity investment product through its private banking service network across the nation on a trial basis. Its investment portfolio includes investment in GEB-listed companies.

"Equity investment products usually invest in a wide range of companies, and if any of these companies get listed on the GEB, the returns could be huge," said a banker with a domestic shareholding bank, who asked not to be named.

Last month the Industrial and Commercial Bank of China floated a two-year trust investment wealth management product backed by Zhongrong International Trust Corporation. The entity acquired stake in a Changsha-based construction investment company operating an infrastructure project in central China's Hunan province.

Bank of China too followed suit by launching a company equity targeted wealth management product with the Kunming Economic and Technological Development Investment Co.

Both the products fall in the grey area of the rules announced by the country's banking regulators, as the funds that banks collected from the public were invested in trusts, rather than for direct purchase of company equity, analysts said.

"In both the deals, banks acted primarily as agents to help sell wealth management products. They were responsible only for checking the qualification of the trusts based on their previous financial results and independent ratings," Wu Xiaoling, banking analyst with Greatwall Securities, said.

(China Daily August 7, 2009)