Banks used to invest wealth management funds in the bond market. But over the past year they've branched into private equity, transportation infrastructure and real estate.
"A lot of wealth management funds are invested in infrastructure fields like real estate and highways," a joint-stock bank executive told Caixin. "As to how much is invested and to what extent risks are accumulated, banks can't see the complete picture.
Sources say banks have become an increasingly important fund-raising channel for private equity funds including CDH Investments, DT Capital and SAIF Partners. In addition, said a banking source, many banks are financing private equity teams of their own.
For example, China Construction Bank and several partner institutions now run a number of industrial fund management companies.
CCB branch offices collect information from loan customers with deposits accounts. The data is then offered to CCB private equity fund managers, who then pick and choose favorites for investing.
CCB's clients include the Yunnan Highway Development Investment Co., a provincial government-affiliated platform for financing road projects, that borrowed billions of yuan. The bank provided loans by selling some 4 billion yuan worth of wealth management financial products to its clients. The platform was close to default early this year.
"Branches understand the situations clients are in," said an investment banker. "Equity investment can better grasp invested companies through banks, and that's also the tendency among lenders."
The upside is that "this sort of combining equity and loans has increased bank competitiveness" by preventing customer turnover yet diversifying business, the banker said.
But a private equity source warned that the system poses risks for the banks that double-up as a customer lender and equity holder. And when the investment involves cash raised through wealth-management products, the risks are stacked even higher.
Some experts warn that this shadow banking system may evolve into a dangerous Ponzi scheme that could collapse at any time, burying wealth management investors along with the banks.
"If wealth management products continue to go crazy, they will evolve into ponzi scheme," said a private equity strategist. "If real estate goes bad, bank financial products will meet with disaster too."
A Bank of China finance manager China told Caixin that wealth management clients can choose from short-term, fixed-income (guaranteed principal and profit) products; non-fixed-income, collective financial products; and high-risk, high-yield and variable rate trust products for investments of at least 1 million yuan.
Interest rates are especially high for products sold toward the end of each month or quarter, the banker said.
A source at a joint-stock bank said capital from a bank's short-term wealth management product goes into a capital pool. The pool's size is maintained by continuously rolling through new products. And an ever-increasing share is steered into high-yield, risky assets, the source said.
A China Banking Regulatory Commission (CBRC) official said this "capital pool method is not consistent" with the regulator's basic "principles" of separate and transparent accounting for wealth management plans.
Rules likewise say Chinese banks cannot invest in mainland private equity funds. But they get around the barrier by working through Hong Kong, said a source at a major, state-owned bank.
"And while growing wealth management funds cannot be invested in PE, they can be invested in trust products," the source said. "Targets for trust products can be all-inclusive, and returns can be higher than that for unlisted equity, land and other targets."
A CBRC official said some banks structured wealth products in ways designed to avoid their own risk control departments. Wealth management research, design, sales and even after-sales service may be handled without risk supervision in some cases.
Thus, managing the wealth product arena has strained nerves among bankers and regulators alike.