Everything You Need To Know About China's Crackdown On $2.1 Trillion Of Wealth Management Products
The Chinese stock market took a hit Thursday after its banking regulator issued new regulations to tighten control over banks' wealth management products (WMPs).
WMPs are essentially a pool of securities (trust products, bonds, stock funds) that have yield that is on average 2 percentage points higher than bank deposits. They are sold as low-risk investments but often are not so.
With a dearth of investment alternatives, WMPs have grown incredibly popular in China in the past few years, reaching 13 trillion yuan ($2.1 trillion) at the end of 2012, a 50 percent year-over-year increase, according to Fitch.
WMPs have been creating risks in the banking sector and some have called it "ponzi finance":
To lower these risks, the China Banking Regulatory Commission (CBRC) announced three key regulations to monitor WMPs (via Societe Generale's Wei Yao):
- "WMPs have to be managed product by product with matching assets, separate accounting and book-keeping." If banks fail to do this they will be prevented from issuing new WMPs.
- "For outstanding WMPs that have not met the requirement above, they should be treated like regular commercial loans in terms of loss provisions and risk weights by end-2013."
- "For each bank, the amount of WMPs invested in debt instruments that are not traded on exchanges cannot exceed 35% of the bank’s total outstanding of WMPs or 4% of its total asset, whichever is lower. Such debt instruments include, but are not limited to, trust loans, entrust liabilities, bankers’ acceptances, account receivables, and equity investment with buy-back clauses."
Yao however thinks banks have been preparing for this, and writes that the new policy isn't intended to "devastate banks, but to cap future risks."