UPDATE: China to Boost Wealth-Management Supervision, Push for Market-Based Interest Rates

    (Adds comment from analysts, director-general of the central bank's financial market department)

    BEIJING--China will steadily push ahead with interest rate liberalization even as it strengthens supervision of wealth management products, according to a government statement on Friday, sending a signal that it wants a gradual approach to loosening its grip on rates.

    The statement from China's State Council, or cabinet, gave no time frame for the goal of making bank interest rates more market-driven--a key move toward shoring up its creaky financial system and lowering barriers to the flow of money in and out of China. Interest rates in China are now subject to guidelines from the central bank, which has taken modest steps in recent months to step up the pace of rate reform.

    At the same time, the statement said the cabinet would guide banks toward separating their wealth management product businesses from their traditional lending businesses. Wealth management products are generally short-term investments sold by banks that offer higher returns than traditional bank deposits.

    Wealth management products have risen in popularity in recent years as Chinese investors look for yields. Because of their higher returns, and because they aren't subject to the ceiling China places on bank deposit rates, they offer banks a greater degree of freedom in determining interest rate levels.

    The statement suggests Beijing will keep a close watch on how banks sell wealth-management products to consumers and make it clear to buyers what they are purchasing. That could moderate the speed at which banks sell a product that has become a de-facto way of skirting limits on interest rates.

    "The key message here is the government prefers a gradualist practical approach instead of a shock therapy," said Lu Ting, economist at Bank of America/Merrill Lynch, in a note.

    Speaking to reporters at a briefing on the government goals, a central bank official said that wealth management products still had a role to play.

    "They serve as an innovation to support real (economic) growth but they entail risks," said Xie Duo, director-general of the central bank's financial market department, speaking at a news briefing.

    "Each financial product has its positive side as well as risk potential," he said. "We must push reforms and prevent risk at the same time."

    The officials didn't give details of how these general goals would be accomplished, though they said funds raised through wealth management products should be directed toward projects that support the real economy.

    In one high-profile dispute, a wealth management product offered by the Shanghai branch of Huaxia Bank failed to repay investors in a 140 million yuan ($22.7 million) investment product after it matured late last year. Investors eventually received their principal but not the promised interest of 11% to 13%.

    Yang Jiacai, assistant chairman of the China Banking Regulatory Commission, told reporters at the same briefing the value of wealth management products had reached CNY8 trillion ($1.3 trillion). But he said they are being strictly monitored and wouldn't lead to systemic risk for the nation's financial sector.

    -Liyan Qi contributed to this article.