China has signed off a set of rules for its small but booming wealth management sector to temper rapid growth and prevent banks from exploiting loopholes to beat regulation.

More than just an area of growth, China's wealth industry has been used by banks to attract deposits and skirt lending restrictions, much to the chagrin of the central government which wants to control lending to manage inflation.

The new rules would, among other things, prohibit banks from using wealth products to attract deposits or from luring customers into buying products that do not conform with their risk appetites.

The 21-page, 80-clause document released by the China Banking Regulatory Commissi6on yesterday stressed that banks must toe the line or be punished. The rules take effect from January 1, 2012.

"In recent years, the wealth management business in commercial banks has grown rapidly," the regulator said, noting that banks have grown more creative in the way they design, sell and manage wealth products.

"But at the same time, the growth has exposed problems and weaknesses," it said. "There have even been instances of misguided or misleading sales, harming consumers' interests and banks' reputations."

In China, the government tells banks how much to lend and at what price by setting loan quotas and limits on deposit and lending rates.

This has fed stiff competition among banks when it comes to courting savers, leading them to sell products with yields well above benchmark deposit rates to attract deposits and support loan growth.

China's wealth industry has grown at an average rate of 45 percent in the past three years, Liu Mingkang, head of the bank regulator, said earlier this year. He said the sector managed 1.7 trillion yuan (US$266 billion) as of the end of 2010.

The rules outlined by the regulator include:

Banks cannot use wealth products to attract deposits or bundle products in other promotions;

Banks cannot lure deposits by raising interest rates in disguised forms;

Promotions cannot be aired on television; they must be fair and open, and explain potential risks in simple language to protect interests of customers who cannot be misled;

Promotions should have this phrase in a prominent spot: "Wealth management is not a form of savings; products have risks; invest carefully;"

Sales tactics such as price discounts and free gifts are not allowed;

Banks cannot promise investment returns or vow to undertake losses when selling products;

Customers must be informed of any changes in investment strategies;

Clients have the right to redeem investments if they do not accept changes;

Sales staff should be judged by how well they sell and the number of complaints they get;

Banks must tell the government who their target clients are and where their wealth businesses are.