“In December, Fitch warned that WMPs were creating growing risks in the Chinese banking sector.
Chinese investors took to the streets to protest that month when the WMPs they bought from Huaxia Bank didn’t pay out the 11 percent returns that were promised.
Wealth management products (WMP) issued by banks have grown extremely popular in China over the last few years. There were reportedly over 13 trillion yuan (or around $2.1 trillion) of WMPs outstanding at the end of 2012, a 50 percent year-over-year increase, according to Fitch.
First let’s understand what a WMP is. This chart from GMO analysts Edward Chancellor and Mike Monnelly shows the make-up of a wealth management product pool and how it operates. WMPs essentially are securities that yield on average 2 percentage points higher than bank deposits, though banks are free to set interest rates.
They are sold as low-risk investments, and the analysts explain that since WMPs advertise “expected” instead of “guaranteed or promised returns” they can hold both assets funded by investors or liabilities raised from them off the balance sheet.
What’s got everyone hot and bothered?
Chancellor and Monnelly explain:
“WMPs share some of the characteristics of both the Structured Investment Vehicles (SIVs) and Collateralized Debt Obligations (CDOs), which were used by U.S. banks before 2008 to keep loans off balance sheet.
Central to the structure is the pooling of investor funds. Money raised from the sale of several different WMPs is aggregated into a general pool. The general pool then funds a variety of assets, investing across the risk spectrum. Some money goes into trust products and LGFV bonds described earlier in this paper, and some is invested in less risky interbank loans…..”
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