HONG KONG (Reuters) - Bringing unsecured Chinese wealth management products, one of the main sources of shadow banking, on the balance sheets of the banks could dent banks' regulatory capital buffers, ratings agency Fitch said in a report on Tuesday.


Chinese regulators have been bolstering their oversight of financial assets including wealth management products (WMPs) that are often sold by banks and not counted on their balance sheets, amid concerns about growing debt in the economy.


Fitch said in its report if unsecured WMPs were accounted for as on-balance sheet assets, average common equity Tier 1 regulatory capital ratios would drop by 1.4 percentage points for state banks and by 2.5 percentage points for mid-tier banks.


It is unlikely that higher WMP fee income compensates banks adequately for the additional risk, it said, adding impairment of just 2 percent of outstanding products would be enough to wipe out all profit accumulated from this business.


"China's bank regulators have recently proposed tighter rules on WMPs," Fitch's report said. "The new rules will create additional costs to banks at a time when profitability is under pressure."

(Reporting by Sumeet Chatterjee; Editing by Muralikumar Anantharaman)