Chinese regulators under pressure after failure of wealth management product

By:
Kanika Saigal
Published on:

A failed investment product, sold by Hua Xia Bank, will reignite a heated debate between the Bank of China and China's banking regulator, in which the latter is accused of not doing enough to keep the growth of wealth managment products in the country under control.

Regulators in China will find themselves under increasing pressure to control the sale of wealth management products (WMPs) on the mainland, after the failure of an investment product sold by a Hua Xia Bank employee in Shanghai.

According to Reuters, the failure of the product, created and marketed by Zhongding Wealth Investment Centre based in Beijing, could be the first case in which depositors have lost money on such instruments.

This follows coverage by Euromoney in November highlighting the debate between Xiao Gang, the chairman of the Bank of China, and Su Xinmin, the director of the China Banking Regulatory Commission (CBRC), in which Xiao accused the regulator of not doing enough to keep WMPs under control.

One of the main problems with WMP, explained Xiao, is that many products are not linked to any specific asset; rather, they are linked to a pool of assets, whose cash inflows might often not match the timing of scheduled WMP repayments.

 
Xiao Gang, chairman of the Bank of China
Source:Reuters
As reported, Su told Chinese online newspaper Caixin in November that the CBRC had made progress with regulating WMP because they now “correspond to an investment portfolio rather than a capital pool”.

He added: “Regulators are against the practice of investing multiple products into a capital pool or a portfolio... With separate accounts, it would be impossible to track each product's investment returns. This violates the principle of managing clients' money on their behalf.

“Any banks whose products don't correspond are being encouraged to take extra precautions to prevent defaults.”

Su also highlighted that the CBRC regularly inspects wealth management businesses and requires external audits.

Although the full details of the Hua Xia/Zhongding case have not been fully disclosed, the event could potentially spark further criticism of the regulators who have failed to control the issuance by Hua Xia Bank.

As interest rates in China have declined, investors have turned to high-yielding wealth management products in a bid for returns. In a report by CN Benefit, a wealth management consultancy based in Chengdu, sales of wealth management products totalled Rmb12.14 trillion ($1.9 trillion) in the first half of 2012 – up 43% on the same period last year.

Investors were attracted by the 11% returns expected from the products, but they discounted a section in the agreement that stated neither principal nor interest would be guaranteed. The investment products did come with default insurance from Zhongfa Investment Guarantee Company, said Reuters.

As Xiao stated, only a few of years ago there were only a couple of hundred WMP on the market; today, there is reported to be more than 200,000 in circulation. According to Fitch Ratings, WMP in China account for approximately 16% of all commercial bank deposits.