China’s WMP whack, revisited; Wealth management products will borrow money from the banks at quarter-end to repay investors just prior to the quarter-end.

The WMP whack, revisited

Joseph Cotterill | Jun 19 17:56 | 18 comments | Share

It’s getting (a bit) clearer of late that China’s interbank crunch is deliberate policy. Still, although of course “We cannot use as fast money supply growth as in the past, or even faster, to promote economic growth” sounds very serious, it’s a bit woolly. Why so keen to withhold official liquidity from Chinese banks, and continue withholding it, right now?Which is why FT Alphaville is pondering the WMP angle again.

We know that in March banks were effectively told to throttle issuance of wealth management products, such as those whose yields come from ‘blending’ various, not-easily traded assets. We know that before ‘Notice/Document No. 8′, interbank assets also made up quite a lot of WMPs.

Pondering all that, we then found this in a Nomura note from last week, looking back at the regulation:

We believe joint-stock banks will be more significantly impacted given they are generally more aggressive in the wealth management business. It may take at least a few months’ time for them to adjust their structure of WMPs and fulfill the new requirements; while during the adjustment period, expansion in interbank assets/liabilities and balance sheet would likely slow down, in our view.

Though fee income from selling WMPs will likely be affected, we think the main impact would be on the management of asset and liabilities. We expect the new measures to limit growth of wealth management products which may affect joint-stock banks which are using them as important sources of deposits and their LDR management. In addition, more off-balance sheet WMPs will need to be brought onto the balance sheet, which will place pressure on capital.

It all appears fine till it is NOT. Document No. 8 will have a profound impact on banks’ balance sheets, the way banks manage WMP business, as well as the yields and growth prospects of the industry…

Maybe it is already?

Further on the off-balance sheet mechanics of WMPs (and the possibility that the current strain owes a bit to WMP-cleaning, and to bringing some back on to balance sheets) — we were also interested in these recent points by Mike Werner of Alliance Bernstein, about how they’ve been used in repo transactions:

We have long argued (and had our suspicions confirmed by individuals at the banks) that some wealth management products will borrow money from the banks at quarter-end to repay investors just prior to the quarter-end. By doing so, banks are able to generate strong quarter-end deposits inflows from household customers as they are repaid their money from the WMPs. This helps to lower the banks’ period-end loan-to-deposit ratio (see Exhibit 17 for our attempt to represent this transaction visually). These deposit inflows quickly reverse into outflows at the start of the following quarter when the product is sold again to investors and the repurchase agreement is repaid to the bank…

Is it the kind of thing where regulators would be quite happy for interbank exposures to be repriced (the ‘crunch’)?