China’s $3.5 Trillion Wealth Product Market Suffers Losses

(Bloomberg) -- Chinese investors and savers just experienced something that’s never happened before: losses on some of their 25 trillion yuan ($3.5 trillion) state bank issued high-yield wealth management products.

Those came as the worst Chinese bond rout in a decade colluded with a push by regulators to transform the nation’s wealth market. They are doing away with products that offer guaranteed returns to tamp down on a key source of leverage and risk at the nation’s lenders.

As traders cut bets on the potential for more stimulus from the central bank, government bond yields soared this month, driving the net asset value on more than 280 low-risk, bond-linked WMPs, or about 3% of the market, below the initial 1 yuan value, according to Chinawealth.com, an official site tracking the industry.

That left many retail investors with accounts flashing red for the first time, and some flocked online to demand explanations and to be made whole. On one consumer-protection website, hundreds of angry investors blasted their banks for the unexpected losses and opaque marketing. Previously, in the guaranteed return era, the banks would have absorbed any losses.

Tena Yu, who’s been enjoying returns of more than 4% a year on her 1 million yuan in savings over the past five years, was taken aback when she saw losses on several her accounts. “I’ve never seen my WMP investments fall below the initial capital I put in,” said Yu, a manager at a commercial real estate firm in Shanghai. Among her investments, the worst performer is a China Merchants Bank Co. product, which has lost 3% so far.

Yu’s consternation comes after a multi-year campaign by regulators to instill more discipline in its wealth market as economic growth slows and the nation opens its financial market to foreign competition. Banks have been forced to ditch a fixed-return model and move toward offering savings products that matches up more with the international mutual fund industry, where investors bear the risk of fluctuating markets and can track the net-asset value of their funds on a daily basis.

While the potential losses in most cases is less than 1%, they could undermine depositors’ confidence in the already fragile banking system. It may also curb inflows into wealth products -- the biggest source of financing for risky borrower that has been targeted by regulators in recent years for its poor disclosure, maturity mismatch and a worsening moral hazard.

“As WMPs shift to NAV-based models, the likelihood of investors seeing more frequent and bigger losses is increasing,” said Jin Qi, president of the Bank of Communication Co.’s wealth management unit. “But this is a necessary part of China’s market transformation and investors must learn to take their fair share of risks.”

WMPs that have their NAVs disclosed reached 12.5 trillion yuan in first quarter, more than half of the total, according to Chengdu-based research firm PY Standard. That compared with 15% before the rules kicked in. Regulators will require 100% compliance on new issuance when a grace period expires at the end of this year.

They are most popular with retail investors, who hold nearly 90% of outstanding WMPs. While policy makers have been trying to crack down since 2017, demand has held steady as investors sought out their relative safety amid shaky stock markets and a slowing economy. Sinking interest rates have also created arbitrage for some companies, which are issuing debt at lower rates and using the proceeds to snap up WMPs.

Conditioning Chinese investors to face losses could help better pave the way for the likes of Blackrock Inc. and Vanguard Group Inc., who are now moving in to capture a slice of some $30 trillion in Chinese wealth assets. Guo Shuqing, Chairman of the China Banking and Insurance Regulatory Commission, said on Thursday the regulator will allow establishment of more foreign-controlled wealth managers and encourage local players to invest more in equities.

The recent dislocation in the market has so far had limited impact, with the pace of WMP issuance holding steady. During the first ten days of June, Bocom’s wealth management unit sold about 10 billion yuan in new products, putting it on pace to reach the 30 billion to 40 billion yuan of products sold in the previous months, according to Jin.

China Merchants Bank, one of the largest WMP issuers, also said its new issuance has not been impacted by the recent price decline in some NAV products. Industrial & Commercial Bank of China Ltd., Shanghai Pudong Development Bank Co. and China Guangfa Bank Co. all declined to comment.

For Yu, in a world clouded in uncertainty and volatile stocks markets, the best defense now is to stay put.

“I plan to hold my investment,” she said. “There’s just no better option right now.”

©2020 Bloomberg L.P.

With assistance from Bloomberg