• Tue
  • Dec 23, 2014
  • Updated: 3:27am

Wealth management industry distorting economy and needs reform, PBOC official says

Industry needs reform as it drives up lending cost and invites gambling, deputy governor says

PUBLISHED : Sunday, 11 May, 2014, 5:25am
UPDATED : Monday, 12 May, 2014, 7:04pm

The wealth-management industry should be reorganised because it is unduly raising funding costs and encouraging savers to behave like gamblers by chasing after lucrative short-term returns, a deputy governor of the People's Bank of China (PBOC) said yesterday.

In an unusually sharp criticism of the rapidly growing wealth-management business, Liu Shiyu said the sector had pushed up funding costs for companies, making credit unpalatably expensive and distorting the mainland economy.

"This type of practice, where water is added at every layer and prices are raised in an exploitative way at every link, directly increases costs in the real economy," Liu told a forum at Tsinghua University.

"There is no contribution to labour productivity and it will lead a nation, it will lead a country's financial system, into a short-term behaviour that is extreme in its gambling mentality."

He said wealth managers were lending money to companies at rates of around 14 per cent, but often offering rates of only around 8 per cent to individuals investing in their funds.

Fuelled by savers' and companies' thirst for higher returns, the mainland's wealth-management sector has exploded in recent years.

Liu warned non-financial companies were increasingly becoming involved in the wealth-management industry, lured by the attractive returns on offer.

With the economy stuttering and growth expected to grind to a 24-year low of 7.3 per cent this year, there are growing concerns about the level of risk associated with the mainland's financial sector.

Banks' non-performing-loan ratios have edged up to a two-year high, though they are still at a modest 1 per cent. The mainland also experienced its first-ever default of a publicly traded domestic bond in March.

Liu warned that the methods companies use to raise cash were causing concern. He said attempts by authorities to reduce firms' reliance on banks for funds in favour of other financing methods such as initial public offerings had been unsuccessful.

Brisk credit expansion coupled with a slowing economy have led some experts to worry there may soon be another painful spike in bad loans.

Liu said official estimates suggested domestic banks wrote off 120 billion yuan (HK$151 billion) worth of bad debt last year, more than the 80 billion yuan in write-offs disclosed by listed banks.

He said the 120 billion yuan worth of write-offs would have erased all the profits that banks would have earned from issuing 4 trillion yuan worth of loans, assuming a net interest margin of 3 percentage points.

Referring to the flurry of wealth-management products being sold online by mainland firms, Liu said companies should not use products billed as being innovative in a bid to dodge regulation.

"In some areas, the current financial innovation is really about avoiding regulation," he said.


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Right now, what's the most profitable business in China ?
You may think it's the property sector, the policy banks or the telecom industry.
But you shouldn't ignore the country's loan shark businesses --- some of them are disguised as those wealth management products, trust products (junk bonds), or entrusted loans in the shadow banking sector.
Forget about the Main-Street businesses, simply utilizing OPM to lend to still other people at much higher interest rates, and your future massive gain is guaranteed !
The interest rate liberalization, and the policy banks' refusal to lend to the SMEs, contribute partly to the high interest rates prevailing in the credit market.
Given such a high M2/GDP ratio in the country, where has all the money gone ?
Part of the money must have been occupied by those zombie SOEs and local governments, which have to constantly roll over their maturing loans, which simply can't be repaid through their normal operating cash flows or local government revenues.
‘… attempts by authorities to reduce firms' reliance on banks for funds in favour of other financing methods such as initial public offerings had been unsuccessful.’
What’s missing in China is a well-developed private equity market --- a complete chain of companies and setup, like business angels, venture capital, management buyouts, management buy-ins, leveraged buyouts, listed private equity companies, private equity investment trusts, public-to-private arrangements, and venture capital trusts.
Take Alibaba.
The company was initially financed by companies like Japan’s Softbank and America’s Yahoo.
These two companies will be tremendously rewarded anytime soon.
Rich people in the world, like Hong Kong’s Mr. Li Ka Shing, can participate in this type of game, simply because they can afford to lose the money --- but the potential gain is too great to be resisted.
Right now in China, an innovative company IPO suddenly props up from nowhere, how can the local stock investors judge whether it pays to invest in that company ?
The recent flood of IPOs in the Shanghai stock exchange only serves to depress further the Shanghai (and Hong Kong) stock index, while enriching at once those company owners.
Success breeds success, failure breeds failure.
In short, economic reforms means transforming ‘failure breeds failure’ into ‘success breeds success’.


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