China’s Wealth Management Products Still Going Strong – For Better or Worse – The Diplomat

Chinese wealth management products (WMPs) remain popular for better or worse, despite exhibiting high levels of volatility, particularly in the early years of their development. Now that WMPs have been regulated extensively, with the most recent big regulation governing cash wealth management products, these assets have become a regular part of China’s financial system. However, such short-term products often remain off balance sheet and may be based on illiquid underlying assets, creating a potential for maturity mismatches and systemic risk. As a result, these highly demanded products are not risk-free.

WMPs have faced declining values in recent weeks. According to Wind data, about 8 percent of wealth management products sold by banks have experienced market price declines to below their net asset value (NAV). An additional 7 percent were about to fall below their NAV.

Due to these declining values, financial firms have attempted to shore up their values by purchasing some of the assets. Indeed, Everbright Bank recently purchased some of its own WMPs in what has been publicized as a vote of confidence for this asset category. This is by contrast to stock buybacks in the United States – when companies purchase their own shares, they must cancel those shares – or to bank rules in the U.S. that prevent banks from investing in funds that may create a conflict of interest or expose the bank to excessive risks. In China, such actions taken by wealth management issuers are seen as positive signals to markets.

Banks have attributed declining values to market volatility and geopolitical instability. The internet crackdown and fragility in the property market have increased uncertainty, as has the Russia-Ukraine war (Chinese media have refrained from labelling Russia as responsible). The new COVID-19 lockdowns and potential U.S. delisting of Chinese companies haven’t helped.

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Due to asset price volatility, some financial companies have chosen to lower servicing fees for their products. Many fees are levied on such products, and financial institutions can compete with one another or customers by altering such fees.

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Wealth management products have proven to be a relatively accessible means of obtaining additional interest incomes for Chinese citizens as well as an important source of profit for financial institutions. Households invest in wealth management products because there are few other easy alternatives to bank deposit interest rates, and the numerous media articles promote WMP investment …….