How Wealth Products Helped Inflate China Real Estate

Alarm bells are ringing in China as people in search of high yields keep investing their savings in wealth-management products. A history of bailouts had many of them believing that WMPs are implicitly guaranteed by the issuing bank or the state. So when Chinese developers started to offer similar WMPs at even better terms, wealthy Chinese snapped them up as well. Now that some of the country’s largest property firms are struggling to repay their debts, investors are discovering they aren’t risk free. The prospect of big losses could jolt the world’s second-largest economy.

They’re investments initially marketed by the wealth-management units of banks as a tool to attract funds. Like mortgage-backed securities were in the U.S., they’re building blocks of a shadow-banking system that exists largely off balance sheets of their issuers -- mostly banks. They typically offer a fixed rate of return of 3% to 5% over a short period, usually less than six months, compared with 1.5% for one-year bank deposits. The WMPs invest in everything from bonds to property and can be exposed to struggling industries like mining. The banks can keep them off their balance sheets provided the products are not principal-guaranteed, which most are not, but they are still subject to regulatory scrutiny.