“A Ponzi scheme”

Raised concerns about wealth management products: Xiao Gang

In the farming town of Taihe in Jiangxi province, there is a largely empty housing estate at the end of an unfinished road. It might not sound like one of China’s most attractive investment opportunities. But a Reuters reporter who visited the development a couple of months ago discovered that the asset underpins a wealth management product known as Golden Elephant No. 38, which offers a handsome return of 7.2% a year.

Wealth management products like Golden Elephant are attracting more media attention, in line with the increasing amounts of capital also being invested in them. Buyers see them as providing better returns than bank deposits but without the risk of equity investments. Sales totalled Rmb12.14 trillion ($1.9 trillion) in January to June this year, up 43% from the same period last year, according to a report from CN Benefit, a wealth management consultancy based in Chengdu.

The problem is that it is not always clear where much of the wealth management money is being invested. Disclosure is poor, while investors attracted to the high returns on offer often fail to rummage through much of the small print that does exist. And while not all of the wealth management products are backed by riskier investments, there is evidence to suggest that a growing number are associated with assets that retail investors might normally steer clear of.

Much of the investment goes into structured deposits, bonds and interbank loans, foreign currency debt, corporate bills and credit products. But citing CN Benefit data, the Wall Street Journal claims that 51% of products have put money into a more amorphous pool of “other” assets which can be difficult to classify. The concern is that some of this capital could be heading into loans or other illiquid credit for borrowers like real estate developers and local government financing vehicles rather than the safer havens of the bond or the money markets.

Of course, more conservative strategies are unlikely to deliver the returns that the banks are promising. But whether investors similar to those in Golden Elephant No. 38 are fully aware of their holdings in projects like the property wastelands of Jiangxi is debatable.

Hence there is anxiety that the unrestrained growth of the wealth management industry could lead to a financial implosion similar to the crisis in mortgage-backed securities in the United States.

The concerns even led to a rare public clash on the topic between two of the bigger names in Chinese finance: Bank of China Chairman Xiao Gang and a director at the banking regulator, CBRC, called Su Xinmin. Perhaps unexpectedly, the bank boss was the more critical voice in the exchange. In an editorial last month in China Daily, Xiao described the way that some wealth management products are being sold to investors as a form of “shadow banking” that is “fundamentally a Ponzi scheme”. This is because new products are often being issued just to cover the returns on older products that are reaching maturity, he said.

The potential mismatch between the short maturity of many of the products on offer and the longer maturity of the loans that banks use to finance them has been raised as a concern in the past. CN Benefit’s report suggests that 86% of products continue to have maturities of less than a year.

Su’s response, reported in Century Weekly, was that the risks associated with the pooling of assets in single products are being exaggerated and that the regulatory authority continues to supervise the sector closely. He also said that just 1.2% of the money invested into wealth plans has gone into the kind of products considered to be at the riskier end of the spectrum.

But Su also made a point that improving investor education is one of the most important issues facing the industry. If investors become more aware of where their money is being invested, riskier products are more likely to be shunned. Still, with wealth management products offering returns considerably higher than bank deposit rates, the temptation is still to ignore the small print and invest regardless. That is, until more of the products start to blow up spectacularly…

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