China's boom in wealth management products makes economists fear

The mainland's smaller banks boosted sales of wealth management products (WMPs) to account for more than 85 per cent of the 3.5 trillion yuan (HK$4.34 trillion) of offerings in the first nine months of this year, raising credit risks and deposit costs, Fitch Ratings said.

Joint-stock, city and rural lenders boosted their share of the 12 trillion yuan wealth management market to 48 per cent from 32 per cent last year, Fitch said in a report last week.

The yield on 2019 bonds sold by Evergrowing Bank, which Fitch said had the most outstanding products of any non-rated bank, has risen 29 basis points this half to 7.38 per cent, according to ChinaBond data.

Globally, finance companies pay an average 2.62 per cent, according to Bank of America Merrill Lynch indices.

Funding costs are rising as banks, whose WMPs offer higher returns than benchmark deposit rates, try to dissuade households from moving their savings elsewhere. The sales are transforming the stable and cheap deposit base that has supported lenders into one that is "more mobile, expensive and short-term", creating repayment risks for smaller banks, Fitch said.

"Some of those projects are quite risky," said Christine Kuo, senior credit officer in the financial institutions group of Moody's Investors Service in Hong Kong. "Banks will have contingent liabilities that could evolve a much bigger cost."

The wealth management vehicles typically offer higher yields than deposits and can include investments in bonds, the money market, discounted bills, trust loans and equity in property projects. The weighted average yield of the products last quarter was about 4 per cent, Fitch said. That compares with 3 per cent on one-year deposits.