Welcome to China’s wealth management industry. One bank offers a “Blooming sunflower” investment plan with an annualised return of 4.6 per cent. Sounds OK; only it matures in 45 days and up to two-thirds could be invested in a bundle of illiquid assets from trust loans to letters of credit with a mismatch of maturities. They could even be invested in servicing other maturing products. Investors cannot know for sure. No wonder the new administration is keen to bring the industry under control.
Last week the banking regulator announced rules capping wealth management products’ exposure to illiquid assets at 35 per cent, or 4 per cent of the offering bank’s total assets, whichever is lower. It also called for individual audits for each product issued.
Assets under management in wealth management products hit Rmb8tn ($1.3tn) last year, up two-thirds from 2011. These products were initially encouraged by regulators to support the deregulation of interest rates by offering competition to low-yielding deposits. But abuse quickly prevailed, prompting banks to book such products as deposits to meet loan-to-deposit ratios in order to carry on lending. Joint stock groups such as China Merchants Bank and Ping An Bank are particularly exposed to the rules, compared with bigger peers such as ICBC, given their large proportion of wealth management products to total assets.