(Yicai Global) July 26 -- By the end of 2016, capital from banks' wealth management products totaled CNY33.64 trillion (USD4.9 trillion), dominating the asset management market with a 28.4 percent share, the China Zheshang Bank and the National Institution for Finance and Development said on July 25.

Over 70 percent of this capital flowed into the real economy, said Luo Ping, senior researcher at the NIFD, meaning over 20 percent of the funds remained in the financial system. By doing this, banks make money through increasing the maturity mismatch. For example, they may use funds that mature in 12 week to buy bonds that mature in 14 weeks, causing significant liquidity risks. In China, this phenomenon is known as flowing from virtual economies to real ones, which is a key economic factor. Such improper regulatory arbitrages must be brought to a stop, he added.

The total volume of banks' wealth management has grown significantly from CNY5.58 trillion in 2012, the report showed. Of this figure, funds invested to guaranteed and non-guaranteed products mainly flowed to liquid assets and bond market investments; with non-standard and equity asset investments as supplements. In contrast, funds from structured entities mainly went to non-standard investment receivables, with other targets being supplementary. Non-standard asset investments totaled CNY12.55 trillion, making up 37.3 percent of total capital from banks' products at the end of 2016, far higher than the proportion of bond investments, which ranked second.

As regulatory policies advance, banks innovate to develop their non-standard investment models in a game of cat and mouse with watchdogs, the report said. After regulators threatened to curb rapid growth in interbank wealth management products, banks moved on to cooperate with trusts. Once watchdogs had cottoned on to the new method, institutions switched to working with securities firms and brokerages. Once specification for banks' wealth management businesses grows clearer, the key to regulation will be to normalize for non-standard asset investments.

Policies began to curb rapid interbank wealth management growth this year and pushed to prevent banks from cross-holding products managed by one another. As specification for banks wealth management grows clearer, the key to regulation will be the normalization of non-standard asset investments.

Non-standard assets, or credit assets, are defined by the China Banking Regulatory Commission as assets that are not traded on interbank markets' securities exchanges. They include trust loans, entrusted creditor's rights, banker's acceptance bills, letters of credit, receivables, any kinds of beneficial interest and equity-based financing with buy-back clauses.

Compared to standard assets, non-standard assets are less transparent and liquid but are more flexible and generate higher returns.