New rules dampen demand for WMPs

These also threaten banks’ profits, however.

Rules seeking to cut risks in China's financial services industry have diminished the appeal of wealth management products, which are high-yield alternatives to bank deposits.

Bank issuance of WMPs fell 8.8% in April from March, said Cnbenefit, a research firm in Chengdu. The average yield decreased to 4.3% in May from 4.4% in March.

The China Banking Regulatory Commission introduced tough new rules in March governing where WMPs can be invested; how assets are managed and standards of disclosure to investors.

The rules give China's banks until the end of the year to reduce the share of WMPs invested in illiquid assets to 35% of wealth products, or 4% of total assets. If they don't, they could be forced to make moves that reduce their profitability, such as allocating more capital to back those assets.

Smaller banks could be hard hit. Small and medium-size banks together have a 60% share of the WMP market, and 15% of their products are in violation of the new rules.

WMPs have grown from close to zero a few years ago to US$1.2 trillion in 2012, said CBRC.