China’s 28tr yuan of wealth management products under mounting stress in second half, analysts say

Wealth management products in China used to be a magical option for investors. They offered high yields and never failed as the banks that sold the products would stand behind them, even if they soured.

Tighter regulations and pressure on banks mean that this is likely to change in the second half, at least for the banks that have bought into products issued by other financial institutions, analysts say.

“Banks usually assume their investments in other banks’ non-principal guaranteed wealth management products (WMPs) are risk-free, based on some informal agreements provided by seller banks. However, disputes will arise if these WMPs fail to achieve expected returns because of recent regulatory and market changes, and the seller banks refuse to acknowledge the informal agreement,” said David Yim, greater China head of debt capital markets at Moody’s Investors Service.

“If, for example, a WMP is going to mature, and suddenly the seller bank says that we didn’t issue this WMP,who would be responsible in such a situation?” Yim asked.

As regulators look to tighten controls around shadow banking, defaults are becoming more likely, while embattled mid-cap banks are less willing to take the loss themselves than they were in the past.

Of course, there is no real reason why they ought to.

“Clearly banks should not be responsible for non-guaranteed WMPs,” said Chen Shujin, chief financial analyst at Huatai Financial.

Nonetheless, an average of 3,700 WMPs were issued each week in the first half of 2016, but only one product issued by a domestic bank reported any form of loss, according to calculations by Fitch.

The ratings agency noted in a report at the end of last year that “this loss ratio appears unusually low”.

Since then default rates have ticked up. In one case earlier this year WMPs sold at a branch of Minsheng Bank were found not to exist.

WMPs issued by Chinese banks have a variety of investors. Approximately half are individuals, a fifth other banks, with the remainder made up of institutional investors and private banks, according to data from the China Banking Regulatory Commission.

The number of banks investing in other banks’ WMPs has increased significantly in recent years. In 2014, banks made up just 3.3 per cent of investors in WMPs issued by Chinese banks.

For investors, the products offer higher rates of return than they could get elsewhere, while the issuing banks gain access to funds. This has become particularly important for banks this year, as liquidity has tightened.

“To some small lenders which simply do not have enough funding to support their activities, WMPs remain an important tool especially when they face quarter-end pressure,” said Marco Yau, senior analyst CEB International Research

“That’s why the WMP yield was sent to 16-month high last month,” he said.

However, because banks tend to keep their WMPs off balance sheet, banking regulators were concerned about the threat they posed to China’s economic system.

“It was a popular practise for banks to issue interbank certificates of deposit and invest in WMPs issued by other banks during 2014 to 2016,” said Yim.

The difference between the very short term duration of the certificates of deposit and the longer term duration of the WMPs made this risky.

“In 2015, over half of the WMP funds were invested in the bond market. Some money managers then used the bonds as collateral to borrow short-term money via the repo market to buy more bonds. By repeating this game, bond markets would be heavily leveraged and lead to excessive risk,” Yau wrote in a recent report.

As a result, a variety of Chinese regulators cracked down on the shadow banking sector, and since the start of this year, WMPs are included on banks’ balance sheets under new regulations.

Following the tightened regulations, the total balance of WMPs issued by Chinese banks decreased to 28.4 trillion yuan (US$4.18 trillion) at the end of May from 29.1 trillion yuan at the end of 2016.

The reduced issuance of WMPs make things more troublesome for issuing banks.

“If things continue to grow at a fast pace you can always refinance to renew the products, as things slow down, then you can’t,” he said.

Nonetheless Yau from CEB International said that authorities would be careful when introducing new regulations on the shadow banking sector.

“We probably won’t see aggressive WMP growth again as in 2015 and 2016, but it doesn’t mean the regulator wants to crack down on the whole thing,” Yau said.

He noted that the pool of investments under management by WMPs is equivalent to 40 per cent of China’s economy.

“It would be a nightmare to the economy if issuers have to unwind the whole thing,” Yau said. “If anything went wrong, the domino effect may turn into a disaster. In this political transition year, I think the regulator


China’s traditional banks lose branding ground to internet rivals

Story image for Traditional from Financial Times

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Bank branding was once non-existent in China; now it is growing rapidly © Bloomberg Share on Twitter (opens new window) Share on Facebook (opens new window) Share on LinkedIn (opens new window) 0 Save 8 HOURS AGO by: Don Weinland In the early 1980s, people in China had a one-stop shop for all their banking needs: the People’s Bank of China. It was, in fact, the only bank in China at the time, as well as the central bank. During the early years of economic reform in the country, citizens, government-owned enterprises and the first green shoots of private business had little choice about who to bank with. Marketing and branding for the state monopoly was virtually nonexistent. More than three decades later, branding for banks in China has taken on new urgency. The banking sector has opened up, adding thousands of new institutions. Choice has proliferated for consumers. Speed, efficiency and convenience in financial services has fashioned new household names, mainly for the internet companies that have experimented in finance. Meanwhile, the brands of powerful state banks are in an early stage of decline. “Beyond the bank’s traditional image, another important thing is convenience,” says Yang Cao, chief operating officer at Yirendai, one of China’s largest peer-to-peer lenders and one of the institutions competing head on with banks. “Younger consumers value convenience a lot. They will look at how convenient your mobile app looks and they pick the bank because of that.” The 2017 BrandZ Top 100 Most Valuable Global Brands ranking shows China’s top four state-owned banks losing ground in 2017. Bank of China, the oldest and most international of the four, tumbled 23 rankings to 94th, while Agricultural Bank of China fell 10 places to 72nd. China Construction Bank fared slightly better, losing eight positions to 54. Industrial and Commercial Bank of China, one of the world’s largest banks by market capitalisation, fell one place to 28th, retaining its position over global competitors such as Citi, JPMorgan and ANZ. The four Chinese banks did not respond to requests to comment on the fall in ranking. By comparison, Tencent, an internet group that launched one of China’s first privately owned banks in 2014, is ranked eighth in global brand recognition, climbing three places in 2017 and trumping the likes of IBM. Alibaba, an ecommerce company that now runs the world’s largest money market fund, rose four places to 14th. Banks are late to the branding game because they have focused mainly on servicing state-owned companies, experts say, often ignoring the rapidly building wealth of Chinese people around them. In sharp contrast, companies such as Tencent and Alibaba founded their businesses on directly serving customers over the internet and have been much more in touch with the financial needs of ordinary people. Alibaba, for example, founded Alipay, an online payment service, in 2004. State companies such as China UnionPay followed that lead more than a decade later in December 2015. Alibaba’s Yu’e Bao became the world’s largest money market fund in March when its assets under management hit $165bn, a testament to how non-financial companies have enjoyed the same trust as banks.