Since the crunch began in early June, many Chinese savers have received messages from banks and their wealth managers, urging them to buy new WMPs, which are are subject to fewer official controls and pay hugher interest rates

China: savers flock to shadow-bank deposits in response to higher rates

Jun 26, 2013 1:37pm by Lydia Guo

China’s recent cash squeeze is having the perverse effect of attracting more savers into the controversial wealth management products (WMPs) that the authorities want to bring under greater scrutiny. The hike in market interest rates that has accompanied the crunch has boosted the returns many banks need to offer on these off-balance-sheet-funds so they can lend the money on to borrowers hit by the squeeze. Since the crunch began in early June, many savers have received messages from banks and their so-called wealth managers, urging them to buy new WMPs, which are similar to time deposits but are subject to fewer official controls and pay higher interest rates.

Dan Bin, chairman of Shenzhen Ebay investment company, said on his Sino Weibo microblog that he received a message from Minsheng Bank, a leading bank, offering a new product generating annualised returns of 9.9 per cent on June. 26. The minimum deposit is a high Rmb3m.

As of June 25, there were 303 WMPs on sale, with more than 30 per cent of them offering expected yields of higher than 5 per cent. On 23 products the annualised return was higher than 6 per cent, and on two products it was 7 per cent, according to Chinese media quoting data from Bankrate, a research company.

The authorities are concerned that the WMPs generate these high returns in an opaque manner in a shadow-banking system that has grown rapidly in recent years. They suspect some of the money goes to cash-hungry developers and to other companies facing difficulties securing normal bank loans.

Because of the lack of information, some critics have even claimed that the some schemes are dishonest. Xiao Gang, former chairman of Bank of China and current chairman of China Securities Regulatory Commission, said last year that the WMPs were no more than Ponzi schemes, where new depositors’ funds are used to finance the return of savings to clients leaving the schemes.

In policy statements on Monday and Tuesday, the People’s Bank of China did not specifically mention WMPs. But it did warn commercial banks to improve their controls over lending. The central bank is anxious about the rapid overall growth of credit in the economy and about the dangers posed by over-stretched lenders and borrowers.

The maturing of many WMPs deposits has been an important factor in the cash squeeze, with deopsitors taking out large chunks of cash. More than Rmb1.5tn of WMP deposits will mature in the last ten days of June, according to Charlene Chu, senior director of Fitch Ratings. She estimates the amount of outstanding WMPs is Rmb13tn, or the equivalent of 16 per cent of commercial bank deposits.

But many depositors seem to be shrugging off both the increased risks that stem from the cash crunch and the official scrutiny.

“I, myself and my parents back in my hometown Hubei are buying WMPs, ” said Joe Zhang, a former banker at UBS and author of “Inside China’s Shadow Banking: The Next Subprime Crisis”.

Speaking at a Hong Kong lunch on Wednesday, Zhang said he and his family rolled over the products over and over again. He said WMPs represented a revolt against financial repression in China, where the authorities suppressed official deposit rates so savers were short-changed. “It’s not enough to pay only 2 per cent (for the depositors), so banks offer WMPs paying 4 to 4.5 per cent, now perhaps 5.5 per cent, it’s a way of keeping deposits.”

What about the risks of WMPs? Zhang says: “It’s actually a little better or at the par with bank loans.” He believes that if a bank defaults on its obligations, the threat of public protest forces officials into action. “When 30 people stand in front of the government, the bank just has to pay it.”

It has happened before. A WMP sold by Hua Xia Bank involving hundreds of millions of dollars last year failed to pay its depositors out on time. Investors went on to the streets with banners in protest. Even though the bank later said it was not responsible for the WMPs, because they had been sold by a staff without its authority, investors still recovered their money early this year.

Overall, WMPs have quite a good track record. When they promise a return, they usually can deliver. According to a research from CNBenefit, a wealth management company, only 4 in 200 products didn’t reach their projected maximum return in the period June 15 to 21, the peak of the recent cash squeeze.

The regulators have adopted new rules this year to govern WMP activity, including a new cap on WMPs backed by non-standard assets, a crackdown on bond trading between banks and their WMPs, and a push for better matching of WMP assets and liabilities. One of the main criticisms of WMP managers is that they take short-term funds from depositors and allocate them, at least in part, to long-term loans, for example in property.

Charlene Chu said in a report that the rules are not expected to be too disruptive. She thinks that the policymakers are still supportive for the expansion of wealth management, as the higher savings rates are considered integral to economic rebalancing.

That may well be true. But the expansion of wealth management is not synonymous with the expansion of the deployment of short-term deposits in long-term lending.

China needs better investor education to help people learn more about the differences between different types of deposit.

The authorities will have to square their hopes for boosting China’ economic and financial development with their determination to boost transparency and control excessively rapid credit growth.