China wants to wean investors off implicit guarantees on the country's ballooning stock of wealth-management products. The effort looks half-hearted at best.
Financial regulators are drafting rules for asset-management products that aim to make it clear they don't carry government backing, people familiar with the matter told Bloomberg News. Besides the central bank, the overhaul involves regulators for the banking, securities and insurance sectors.
The concern is understandable. Asset-management products, mostly held off-balance sheet, totaled about 60 trillion yuan ($8.7 trillion) as of June 30, equal to more than three-quarters of China's 2016 gross domestic product. Wealth-management products, a shorter-duration subset sold mostly by banks, jumped 30 percent to more than 26 trillion yuan last year.
Yield-hungry savers have flocked to WMPs because they offer returns as high as 8 percent -- far more than the one-year benchmark deposit rate of 1.5 percent.
Proceeds of the products have increasingly been invested in lower-rated bonds sold by risky borrowers and in property projects (for which they are a key source of funds).
Chinese investors have been sanguine about these risks because of the perception that the products carry an implicit guarantee from the banks selling them or, ultimately, the government. A history of bailouts has fostered this belief.
Take, for example, Credit Equals Gold No. 1, a high-yield product distributed through branches of Industrial & Commercial Bank of China, the nation's biggest lender. Funds were invested in a coal miner that collapsed in 2012. ICBC initially balked at bailing out the product, only to reverse course after investors protested outside a branch in Shanghai.
Such incidents have bolstered confidence that authorities will backstop WMPs. The proliferation of these products, which generally have terms of six months or less, has been so great that they could trigger a liquidity crunch if investors suddenly get cold feet.
The bandwagon has spread from individuals to companies, which are plowing more cash into the investments, according to the Financial Times. WMPs are also increasingly investing in each other, raising the possibility of a chain reaction in the event of defaults.
So it makes sense to push the risk of these investments back to where it belongs, on the buyer. Unfortunately, the mooted regulations are unlikely to do that. For one thing, the disclaimer on guarantees will apply only to future asset management products. If anything, that will only strengthen the impression that existing investments do carry some form of guarantee.
At the same time, financial institutions will be required to set aside 10 percent of fees from managing clients’ assets as reserves for potential losses. This risks complicating the buyer-beware message. The idea is to let customers know that they alone bear the risk that goes along with higher returns; setting up a fund to mitigate losses may instead only reinforce a sense of safety.
China's regulators can't be blamed for sending out mixed signals. The stock of WMPs is already so huge that a harsher line would risk killing the market, with potentially catastrophic consequences. Whatever the authorities do, this may turn out to be a case of too little, too late.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Nisha Gopalan in Hong Kong at firstname.lastname@example.org
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