China's bank regulator steps into WMP ponzi row

China’s banking regulator has said wealth management products (WMPs) issued by banks should not fall under the shadowy private-lending system, moving to calm fears of a giant ponzi scheme.

China Banking Regulatory Commission stated last week that principal-guaranteed products, typically invested in money markets, should be included on bank balance sheets, meaning banks will have to provision accordingly, Reuters reports.

While non-principal guaranteed products will continue to be treated as off-balance-sheet items, they too will not be classified under the shadow banking system, or non-bank private lending.

But WMPs developed and issued by financial institutions other than banks, including trust companies and securities firms, will likely remain part of the shadow banking industry.

A source from one large commercial bank stated that the regulation surrounding WMPs is clear and that it fully understands the volume and investment of WMPs launched by banks, and as such these products should not be counted as shadow banking, Reuters reported.

The CBRC declaration comes after an investor protest last week, as reported, amid fears that loosely regulated WMPs could undermine China’s financial system.

Lillian Zhu, senior analyst at Shanghai based consultancy Z-Ben Advisors, agrees that money managed by banks should not fall under shadow banking. However, she points out that this statement does not remove the risks of these products.

In fact, she suggests CBRC's move indicates that it thinks the WMP industry is under control and as such may not be inclined to tighten regulatory controls surrounding issuance.

Last week, investors in Shanghai claimed that WMPs they bought in a branch of Huaxia Bank had failed to deliver promised yield. Huaxia blamed a rogue salesperson for acting without the bank's authorisation. 

In a report last week Fitch raised concerns over WMPs, particularly their roll-over nature. "Proceeds raised from products containing credit can be used to repay, roll over, or purchase borrowers’ existing loans……when in fact the loans are not being repaid by borrowers themselves, but rather by investors,” it wrote.

Fitch points fearfully to the opacity of these products, with no centralised data on what has been issued and by whom, or even the make-up of asset pools backing WMPs.

Another risk is that banks might engage in transactions with their own and each other’s WMPs, potentially undermining their balance sheets on a grand scale.

In China WMPs are usually short term, with around half of all new products launched in the first nine months of this year having a duration of one to three months, with a yield ranging from 4-5%, which is higher than bank deposits.

China’s WMP industry is huge and growing fast: as at the third quarter there was an estimated Rmb12 trillion in outstanding WMPs, and it is expected to hit Rmb13 trillion by the end of this year, from Rmb8.5 trillion at the end of 2011, finds Fitch. 

Banks are the main issuers of WMPs. Last year they sold an estimated Rmb17 trillion in WMPs, compared with sales volume of around Rmb1 trillion for other financial institutions, notes Zhu of Z-Ben.