Zhang Defa hurried into an Industrial & Commercial Bank of China branch in Shanghai on a sizzling July afternoon breathlessly looking for the manager. The day before, Zhang had received a text message saying the bank was selling a 37-day wealth-management product with a 5 percent expected annualized return, principal guaranteed. He was too late. The offer, requiring a minimum investment of 500,000 yuan ($81,500), had sold out in less than three hours. Zhang would have netted 2,534 yuan in only five weeks. “This is crazy, but where else can I put my money without losing sleep these days?” says Zhang, a retired engineer who has been moving cash out of his savings accounts into such investments for more than a year. “The return is fairly decent, and more importantly, I know my money is safe at a government-owned bank. Even if the bank runs out of the money, the government won’t.”
Chinese investors hold more than 32,000 wealth-management products, and their value has surged eightfold from 2009 to the end of March, to 8.2 trillion yuan, according to government data. (That’s almost the size of the Australian economy.) Fitch Ratings put the value even higher in May, at 13 trillion yuan. And the numbers are growing: A record 1,137 wealth-management vehicles were sold by about 70 banks in the two weeks ended June 28, an increase of almost 50 percent from the first two weeks of the month, according to Benefit Wealth, a Chengdu-based consulting firm that tracks the data back to 2007.
Although banks offer the investments, government officials consider them to be part of China’s shadow banking system, because they aren’t regulated as tightly as conventional accounts and often don’t appear on balance sheets. Savers like wealth-management products because they generally offer higher returns than bank accounts, whose rates are fixed at 3 percent. Banks like them, too: With the Chinese central bank keeping a tight grip on credit to discourage speculation, they are growing more dependent on such higher-return vehicles to attract cash they can use to lend out and invest.
As investors pile in, financial institutions need more inflows of funds to pay off maturing products, resulting in mounting risks that prompted China Securities Regulatory Commission Chairman Xiao Gang to call them a Ponzi scheme even before the latest record purchases. “In an environment where liquidity is tight, banks will find it more and more difficult to attract fresh money to keep the game going,” says May Yan, Hong Kong-based head of China banks research at Barclays.
Another concern is that about 70 percent of wealth-management products don’t have their principal guaranteed by the banks. Banks invest about half the money in low-risk vehicles such as bonds and money-market loans. The rest goes into riskier areas, including stocks, derivatives, and loans to local governments and property developers, according to the China Banking Regulatory Commission.
Some banks state the risks on a screen at the entrance to their branches, but the CBRC said in January that most customers regard wealth-management programs as safe. “Banks have a long history of taking deposits, and everybody thinks it’s risk-free to put money there,” Shang Fulin, chairman of the CBRC, said on June 29. The wealth-management products “are actually a type of investment” and “investors must shoulder some risks,” he said. “The question is, Did banks clearly tell them of that?”
So far, most of these higher-return bank offerings have lived up to expectations. In May, among 2,255 maturing wealth products that disclosed performance, only four—which were linked to the performance of gold and foreign currencies—failed to deliver the highest expected yield, according to Benefit Wealth. Yet if there are more disappointments, investors could demand compensation. “The big question is not only how do banks meet their ever-growing obligations, but also how to make hundreds of millions of investors realize that these are not real deposits,” says Ye Linfeng, an analyst at Benefit Wealth. “Such false perception is devastating to banks, which essentially assume far more responsibility and liability than they should have and can possibly cope with.”
Investors such as Zhang, the retired engineer, say they aren’t bothered. “These things are not for me to worry about,” he says. “The bank must know better. All I care is that I put my money here, so this is where I am going to collect it back, not one cent less.”