China's wealth management products: a Ponzi scheme?
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China's wealth management products: a Ponzi scheme?

Wealth management products are competing with bank deposits in China, as savers seek higher yields. But does China's regulatory body have things under control?

Wealth management products (WMPs) in China are an alternative to a bog-standard bank deposit. Mandated by the People’s Bank of China, interest rates for bank deposits are a measly 3.25%, after cuts in the summer. Compare this to the heady interest an investor can expect from WMP – around 5% now, although rates have been known to reach the 8% mark – and the choice is simple. In an article published in the People's Daily in October, Bank of China chairman Xiao Gang defined how WMPs work:

“Chinese banks work closely with trust companies or other entities by packaging trust loans into WMPs, offering investors a higher yield than conventional bank deposits can. These products are mainly sold by commercial banks either at their branches or online. Many of the funds that were obtained through these channels went into real-estate development, infrastructure projects, the manufacturing sector and local government financing vehicles. Banks are playing the role of 'middlemen' between the recipients and investors.” 

A few years ago, there were perhaps only a couple of hundred WMPs in circulation, but today it has been reported there are more than 200,000 in circulation. This increase is testament to their popularity and the search for yield. However, as many reports and articles have previously stated, there is one pretty big problem with this: measuring their precise value is a difficult task because bank disclosure has traditionally been poor. As Xiao says:

Fitch Ratings says that WMPs account for roughly 16% of all commercial bank deposits, while KPMG reports that trust companies will soon overtake insurance to become the second-largest sector in the Chinese financial industry. According to a report by CN Benefit, a Chinese wealth-management consultancy, sales of WMPs soared 43% in the first half of 2012 to RMB12.14 trillion ($1.9 trillion).

The China Banking Regulatory Commission (CBRC), however, sees things slightly differently. Citing CBRC data, a Singapore-based credit market observer says:

"The CBRC’s data on outstanding bank WM products is the following: RMB6 trillion at 1H12, RMB4.57 trillion at FY11, RMB2.8 trillion at FY10, RMB1.7 trillion at FY09. This is over 60% YoY annualized. 60% of outstanding issuance is invested in interbank money market funds and corporate bonds. 25% is invested in non-bank channels like trusts, entrusted loans, etc. 10% is invested in higher risk assets like equity. 5% is unclassified. Very little (and shrinking) is invested in real estate, according to the CBRC data."

So, the banking regulator, whose job it is to make sure such actions are under control, doesn’t think the problem is as big as the Bank of China says it is.

However, Xiao reckons the CBRC is downplaying the structural risks and the scale of the problem. In the same October article, he says:

“China's shadow banking sector has become a potential source of systemic financial risk over the next few years. Particularly worrisome is the quality and transparency of WMPs. Many assets underlying the products are dependent on some empty real-estate property or long-term infrastructure, and are sometimes even linked to high-risk projects, which may find it impossible to generate sufficient cash flow to meet repayment obligations.

“Moreover, many WMPs are not even linked to any specific asset, rather, just to a pool of assets, whose cash inflows may often not match the timing of scheduled WMP repayments.

“In fact, when faced with a liquidity problem, a simple way to avoid the problem could be through using new issuance of WMPs to repay maturing products. To some extent, this is fundamentally a Ponzi scheme. Under certain conditions, the music may stop when investors lose confidence and reduce their buying or withdraw from WMPs. The rollover of a large share of WMPs could weigh heavily on formal banks' reputations, because many investors firmly believe that banks won't close down and they can always get their money back.”

CBRC’s director Su Xinmin, however, disagrees. In a push to monitor WMPs, the regulator has started to encourage banks in China to update their financial information management systems. As quoted in an article by Caixin Online:

“CBRC's moves appear to have had the desired effect as most wealth management products now ‘correspond to an investment portfolio rather than a capital pool’, Su said. And any banks whose products don't correspond are being encouraged to take extra precautions to prevent defaults.

“‘Regulators are against the practice of investing multiple products into a capital pool or a portfolio, Su said. ‘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.’

“In addition, he said, CBRC regularly inspects wealth management businesses and requires external audits.”  


“To smooth the investment landscape, CBRC officials have started working on several proposed policies designed to streamline investor access to bank data. For example, banks may be required to rank wealth management products according to risk before offering them to clients, giving each investor a chance to make decisions based on his or her risk appetite.”  

So, as far as Su is concerned, the regulator is doing its job properly and the banks are complying, while Xiao argues that WMP from banks simulate a Ponzi-like scheme – even though the bank, with its low interest rates on deposits, has encouraged business in this sector.

As the market observer who has monitored the debate tells Euromoney, if you read the full Chinese version of the article, a few more nuances arise:

“Su’s response is that WMPs are not a Ponzi scheme because, (i) since consumers are not well-educated about the risks, banks must be extra careful and have strong internal procedures, (ii) banking culture in China is more responsible than it was in the west, and if any banker is caught selling Ponzi-like or fraudulent WM products, they will not get jobs elsewhere in the industry, (iii) WMP products are too small in scale to be considered Ponzi.

“This rebuttal worries me because, point (i) logic is circular, point (ii) is either naive or bullshit, and point (iii) is true but irrelevant."  

The article by Caixin is a valuable piece, since it is one of the few public comments by the regulator on this rapidly growing sector. 

However, according to our credit analyst contact and the Bank of China chairman, the regulator is far too sanguine about the structural challenges and the threat of misallocated credit. Watch this space.

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