Attractive returns on wealth management products reflect liquidity squeeze
Wealth management products with returns of up to 10 per cent are a boon for investors, but represent systemic problems at China's banks
Bank accountant Amanda Li is counting down to annual bonus day.
She said the 50,000 yuan (HK$63,400) she expects to receive could earn 750 yuan in interest for a three-month investment in a wealth management product (WMP) - a 6 per cent annualised return that she could use to buy herself a pair of boots.
"Wealth management products usually offer high interest rates at the end of the year as banks boost deposits to meet regulatory requirements," she said. "This year, the rates are especially enticing."
Among the 358 wealth management products offered by banks last week, the average annualised interest rate was 6 per cent, according to CN Benefit, a Beijing-based financial consulting firm.
That compares with returns of 4 to 5 per cent before China's interbank rate surged from the middle of last month.
The money market's benchmark seven-day repo rate touched a post-June high of 9.8 per cent on December 19 and remained high in the following days until the central bank kicked off a 29 billion yuan, seven-day reverse repo on December 24.
Although money rates have steadied this week, analysts caution that demand for cash could soar again before the Lunar New Year holiday starting from the end of this month.
"Liquidity is expected to be tight this month before the Lunar New Year, the traditional season of cash shortage," said Qu Qing, an analyst at Shenyin Wanguo Securities in Shanghai. "Wealth management products will well reflect market rates."
Wealth management products are invested in money market funds, treasury bonds, trust products and other investments. Unlike deposits, they are not subject to any benchmark rates set by the People's Bank of China, and better reflect market rates at a time when banks compete for funds from individuals.
Internet companies are making the competition fiercer.
Shanghai Tiantian Fund, a fund sales website, is promoting money market funds with expected annualised returns of up to 9 per cent. A product from portal website NetEase boasting a 10 per cent annualised return received 500 million yuan in subscriptions in 80 minutes on December 25, while search engine Baidu received three billion yuan in subscriptions for a Harvest Fund WMP with an expected annualised return of 8 per cent on December 23.
"The high return of wealth management products may please investors, but for China's financial sector, the tight liquidity behind it sends a dangerous signal," said Zong Liang, deputy head of Bank of China's international finance research institute.
The two liquidity squeezes last year underscored a structural imbalance in the mainland's financial market, where massive flows of funds went to inefficient sectors, Zong said.
Funds raised through the WMPs are lent in the interbank markets to other financial institutions and intermediaries, with some of them finally finding their way to problematic borrowers that find it difficult to acquire bank loans directly.
But if a borrower defaults, all the financial institutions in the loop are affected.
To avoid a crisis, banks issue new WMPs to repay existing subscribers, creating a "Ponzi scheme", according to Xiao Gang, a former Bank of China chairman, who warned of the problem in a China Daily article in 2012.
Outstanding WMPs in banks totalled 9.08 trillion yuan at the end of June, up about two trillion yuan from the beginning of last year, official data showed.
As long as banks continue to finance long-term investments with short-term WMPs, the asset-liability mismatch will exacerbate money market volatilities, send money rates soaring and force lenders' wealth products to offer higher returns, economists say.
"Liquidity squeezes will come again, and each time they will become more and more intense," said Xu Weihong, a researcher at Southwest Securities.