Wealth management products are envisaged as belonging to the shadow banking category in China. But despite credit risks from ties to wealth management products, Chinese banks see them as another channel to bolster their revenues. Even political leaders and bureaucrats seem to tolerate it for the time being
HONG KONG–Bank of Tianjin, a commercial lender based in China’s northern port city, priced its Hong Kong initial public offering (IPO) near the bottom of expectations.
Investors obviously do not find this $949 million proceeding most alluring. When sifting through details of disclosures in its IPO prospectus, they can probably find some clues.
For instance, the bank said they had sold 97.45 billion yuan ($14.9 billion) of wealth management products in 2015 through September, earning an ostensibly handsome profit of 183.9 million yuan ($28.24 million).
Wealth management products refer to bundled assets sold to affluent bank customers.
According to the prospectus, the sales volume of wealth management products in the first nine months of 2015 already exceeded the total of 2014 by about 77%. Nonetheless, the brochure also confesses that some of the wealth management products are secured by a collateral, and in some cases these “collateral” merely consist of “non-standard credit assets secured by mortgages or pledges.”
Wealth management products are booming these years. Well-off bank customers are convinced that wealth-management products offer higher yields than deposits.
For Chinese banks, conventional banking, such as extending loans to state-owned enterprises at a low interest rate, can barely generate any profit, if not incurring bad debts. Therefore, the emerging opportunity brought about by wealth management products has provided another channel for them to bolster revenues.
For what is worth, wealth management products are envisaged as belonging to the “shadow banking” category, meaning they are non-bank financing. Apart from wealth management products, “shadow banking” in China also includes entrusted loans, and bankers’ acceptance bills.
Shadow banking has triggered considerable concerns on finance security and social stability. In November 2012, furious investors took to streets after a wealth management product they bought through Huaxia Bank failed to deliver the promised 11% interest. Eventually, Huaxia Bank had to allow the product, run by a private asset management firm Zhongding Wealth Investment Centre, to default in December the same year, incurring a huge amount of losses for the bank.
Another crisis related to wealth management products erupted in 2012. “Credit Equals Gold #1,”a 3 billion yuan ($470 million) wealth management product, was unable to pay the promised 10% yield to investors. Luckily, a systemic disruption was prevented following a spate of bail-outs, albeit at the expenses of taxpayers.
Chinese leaders have a love-hate attitude towards shadow banking. On the one hand, they find shadow banking can effectively fuel economic growth. China’s economic growth is now at a 25-year-low and the contribution of shadow banking towards economy is not to be underestimated. On the other hand, this undertaking is also stoking institutional or even systematic risks, which will jeopardize themselves politically.
Reining in the shadow banking sector, making its benefits outweigh its drawbacks, thus becomes a pressing agenda. In July 2014, China’s banking regulator stipulated a guideline to banks, demanding the lenders to separate their wealth-management product business from retail lending business.
The rules, issued by China Banking Regulatory Commission, try to contain the risk of wealth management products by setting up partitions for conventional banking and shadow banking respectively. It orders banks to set up separate systems pertaining to accounting, statistical analysis, risk management, as well performance appraisal systems.
In addition, all banks involved must establish independent departments to oversee wealth management products. It also requires frontline sales persons to explain clearly the provisions in sales documents, that these products are not deposits and can be risky.
It is noteworthy that opinion is divided even among policy-makers on how to further enact proper regulations. On 23 March, Wu Xiaoling, vice chairwoman of the Financial and Economic Affairs Committee of the National People’s Congress and a former deputy governor of the People’s Bank of China, said that all finance products should be under the supervision of China Securities Regulatory Commission rather than China Banking Regulatory Commission.
Some critics echoed Wu’s remark. They said the current regulatory system is fragmented and it makes efficient regulation impossible. It is rumored that a super regulator will be established by the end of this year, and that the China Securities Regulatory Commission, China Banking Regulatory Commission and China Insurance Regulatory Commission, will be under one umbrella eventually. However, the top leaders seem to have not yet made up their minds.
Despite the mysteries shrouding the shadow banking, one thing is certain though. Shadow banking in China is rife with political factors. Bureaucrats and politicians could eradicate it if they really want to. But the very existence of wealth management products reflects the leaders’ desire to tolerate it, at least for the time being.
Fong Tak Ho is a long-time Hong Kong journalist who has worked for the Hong Kong Standard, the South China Morning Post, Ming Pao, Asia Times Online and other publications.
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