Chinese wealth management Products (WMPs) are a form of asset backed shadow banking deposit, paying above the rates of regulated banks. The WMPs have been soaring to become the second biggest segment of the financial system. The incur large maturity mismatches and hence are subject to serious liquidity risks.

Source: Various

Sales of Wealth Management Products (WMPs) soared 43% in the first half of 2012 to 12.14 trillion yuan (USD1900bn or about 32% of GDP), according to a report by CN Benefit, a Chinese wealth-management consultancy…The China Banking Regulatory Commission, which oversees banking products, said more than 20,000 wealth management products were now in circulation, from a few hundred just five years ago.…. Fitch Ratings says that WMPs now account for about 16 per cent of all commercial bank deposits; KPMG says trust companies will overtake insurance to become the second-biggest component of the financial sector.

WMPs are like a term deposit, only they offer Chinese investors a more appealing rate (which will deliver a negative real return) and they can be backed by assets, effectively, an informal securitisation….They are usually created in China’s “shadow banking” system – non-banking institutions that are not subject to the same regulations as banks – which has grown to account for around a fifth of all new financing in China.

For banks, the benefits associated with WMP issuance stem from the ability to shift the assets and liabilities underlying WMPs on- and off-balance-sheet, which they typically do through strategically setting start- and end- dates. This enables banks to lower deposit balances between periods to avoid high reserve requirements, while giving them the flexibility to bring the deposits back on-balance-sheet at period-end to pad loan/deposit ratios.

Reuters reviewed more than 50 wealth-management and trust loan products, available online and at bank branches in China, with the aim of tracking, for the first time in certain cases, where investors’ money in these products ends up. All, except two WMPs, failed to explain or even display the underlying asset behind the product.

Not all WMPs are backed by real-world assets. At the same time as the risks around WMP issuance are gaining attention, something else is going on in Chinese financial system: interbank assets are surging…”Some banks have been using new (wealth-management product) proceeds to cover losses from previous products in the pool,” said David Cui, a strategist at BofA Merrill Lynch. “In our view, this is not fundamentally different from a Ponzi scheme. The music may stop at a certain point if and when WMP asset size stops expanding.”