Wealth management products are becoming the object of suspicion and worry on the mainland. Investors have little idea where the money they put into these products ends up. In fact, a considerable portion is channelled to risky borrowers: problematic industries and local governments with poor solvency. To make things worse, the products are kept off banks' balance sheets, resulting in a lack of supervision of their creation and sale. "Don't bother to understand a wealth management product. The more you look into it, the more you get confused," Zhong Xiaotian, a company accountant in Beijing, said. With her annual bonus, Zhong subscribed to a 181-day wealth management product at a major lender that offered an expected annualised return of 4.3 per cent, enticing compared with the 2.8 per cent offered for six-month deposits. Zhong said she took the plunge because of the higher return, although she was practically in the dark about where her money was going. The description for the product she bought is typical of the information an investor sold such an offering by a mainland bank is given: 10-50 per cent of the funds will be invested in highly liquid assets, including bonds, bond funds, money market funds and interbank deposits, and 10-90 per cent will go to various trust funds and equity investments. The wide range of potential investments gives the bank considerable flexibility, but little light is shed on the risks attached. Some products were not linked to any specific asset but just to a pool of funds flowing to a destination unknown to the investors, Bank of China president Xiao Gang said. The investments' returns could be mismatched to the product's scheduled payments, as is usually the case. "Some have said the wealth management products are Ponzi schemes, which repay subscribers from the money contributed by later participants," Guo Tianyong, a professor at the Central University of Finance and Economics in Beijing, said. "If the argument is correct, then the whole banking system on the mainland is a Ponzi scheme, because asset mismatch with liabilities is prevalent." A six-month 10,000 yuan (HK$12,500) product sold by a bank would be perfectly matched with an investment with a similar maturity - say, a 10,000 yuan bond maturing in 180 days - into which the bank puts the money. But a mismatch occurs if the bank invests instead in a property development project that will start to generate returns three years later. To cover principal and interest payments to the subscriber, the bank may use funds from new subscribers. Xiao, a strong contender to be the next chairman of the China Banking Regulatory Commission (CBRC), was among the first to call the products "fundamentally a Ponzi scheme to some extent". In a commentary in China Daily in October, he warned of a risk to the entire banking system "once the music stops", as investors lose confidence and reduce their buying of the products. The music did stop in the case of a product distributed in a Shanghai branch of Huaxia Bank last month. The investment failed, and dozens of investors protested at the branch, demanding reimbursement. "It's just a start. We will see more defaults … this year," said Zhang Zhiwei, chief China economist at Nomura Securities. The number of defaults is expected to surge this year, as the economic expansion since the 2009 stimulus has led to excessive debt in certain industries and local governments, which increasingly rely on credit from banks' wealth management products through trust companies. Outstanding products swelled 65 per cent in value in the past year to 7.6 trillion yuan at the end of December, the CBRC said. Analysts put the number higher, estimating the balances in the products to be 10-12 trillion yuan at the end of last year. Up to 20 per cent of the funds put into the products went to collective trusts, started by trust companies and with the highest risk and return, Bank of America Merrill Lynch said. Major borrowers from trust companies are those having difficulty obtaining funding from banks and the bond market: local government financing vehicles with unprofitable projects, property developers, and firms, such as steelmakers and cement producers, in industries suffering from excess capacity.