China’s planned capital rules for banks’ wealth management units may provide a boost to both credit growth and the country’s stock market, according to JPMorgan Chase & Co.

The China Banking and Insurance Regulatory Commission on Sept. 20 published draft rules requiring net capital of banks’ wealth businesses to be at least 40% of their net assets. Should the draft be adopted, banks’ issuance of wealth management products -- often seen by investors as quasi-savings with higher returns than deposits -- may rebound, JPMorgan analysts led by Katherine Lei in Hong Kong wrote in a note on Friday. 

Outstanding wealth management products totaled 27 trillion yuan ($3.9 trillion) at the end of June. The offerings are a key prop to the nation’s shadow banking industry; demand for such products boomed in recent years amid a sluggish stock market and limited investment options. Yet policy makers have been trying put a damper on them since 2017, with the chief banking regulator stressing that high risks come with high returns.

While renewed growth in WMPs would lower funding costs for both corporate and government bonds, as well as banks’ capital instruments, a “rebound in shadow credits may lead to higher financial risks in the long run,” Lei and her colleagues wrote, suggesting that the rules could have been tougher.

For example, risk weightings drafted for WMP holdings of other banks’ capital instruments, such as perpetual bonds, could spur further cross-holdings among lenders, the analysts said. Banks may also allocate more of their WMP portfolios into equities as the risk weightings for investing client money in listed shares are zero, they added. Stocks made up only 2% of the total at the end of last year.

Read more: A QuickTake on China’s WMPs

Still, Moody’s Investors Service said on Wednesday the capital rules are “credit positive” for China’s banks as they will strengthen the WMP units’ abilities to cope with risk and discourage banks’ wealth management units from excessive allocation of clients’ money to riskier shadow banking sector such as private debt and private equity.