Factbox-What Are China’s Wealth Management Products?

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SHANGHAI (Reuters) – The struggles in China’s real estate industry have highlighted a unique off-balance sheet financing source used by the industry called wealth management products (WMP) and often sold to retail investors.

This week, real estate developer Kaisa Group Holdings said its financial unit missed a payment on a WMP. WMP’s missed payments by cash-strapped developer China Evergrande Group sparked protests from investors.

Here’s what you need to know about Chinese wealth management products:

WHAT ARE THEY?

WMPs are investment vehicles marketed by issuers, including banks and real estate developers, to individual investors and businesses, often paying much higher returns than deposits.

Those issued by banks are generally categorized as fixed income, with investment portfolios that include bonds, stocks, futures, and other sectors.

WHAT ARE THE RETURNS?

They vary. China Merchants Bank, one of the country’s largest lenders, offers wealth management products with an estimated return ranging from 2.95% to 6%, depending on its application. Regional lender Ningbo Bank offers WMPs with estimated yields of up to 9.5%.

Evergrande, by comparison, has sold products promising annual returns of almost 12%. These products were issued in the name of Evergrande suppliers but guaranteed by Evergrande in the event of default by issuers.

While the annualized returns of these products are generally higher than the deposit rates, regulators have decided to ban banks from attracting investors with guaranteed returns.

HOW ARE THEY REGULATED?

The banking regulator began ordering banks to fully disclose all information relating to their wealth management products from 2013, a decade after the China Everbright Bank released the country’s first banking wealth management product.

Regulators also released sweeping new asset management rules in 2018 to further restrict bank wealth management products, with bans on return guarantees and the requirement for banks to create management units. of autonomous heritage.

WMPs sold by companies such as Evergrande, however, are off the radar of banking and insurance regulators and are registered on poorly regulated local financial asset exchanges.

In September, the Shenzhen city government said it had launched a full investigation into “issues related” to Evergrande Wealth.

WHO ARE THE ISSUERS?

The wealth management units set up by Chinese banks are the main issuers of WMP, generally raising funds from bank customers.

At the end of September, there was 27.9 trillion yuan ($ 4.37 trillion) outstanding in the Chinese bank wealth management market, with nearly 71 million individual investors holding such products, according to Chinawealth. com.cn, an official industry monitoring site.

However, China’s years of efforts to deleverage its economy have also prompted businesses, including real estate companies, to resort to off-balance sheet vehicles in search of financing, which are sometimes presented as asset management products. heritage to attract individual investors.

HOW IMPORTANT IS THE ENTERPRISE WMPS MARKET?

There is no official data on the size of the market.

Evergrande Wealth, a unit launched by Evergrande in 2016 as a peer-to-peer online lending platform that was originally used to finance its real estate projects, has sold WMP products to over 80,000 people – including employees, their families and friends as well as owners of Evergrande properties – and has raised more than 100 billion yuan in the past five years, a sales manager told Reuters. [L4N2QM1U0]

WHY ARE THEY POPULAR?

China’s economic growth has created a large class of investors. According to HSBC, 96% of Chinese urban households own property and more than 2 million people have at least $ 1.5 million to invest.

However, capital controls, limited onshore investment options, and low deposit yields have long pushed the Chinese to seek higher yields in WMPs.

($ 1 = 6.4000 Chinese yuan renminbi)

(Reporting by Zhang Yan and Tony Munroe; Editing by Emelia Sithole-Matarise)


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