Across The Border | China’s 28tr yuan of wealth management products under mounting stress in second half, analysts say
Rules intended to clamp down on shadow banking are likely to result in rising defaults among wealth management products, raising concerns whether banks will guarantee the investments
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 Yin, 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?” Yin said.
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.
