Chinese banks are starting to create a web of risk through their wealth management products (WMPs), raising concerns about the health of the financial system just as China's economic growth has slowed to its weakest pace in 25 years.
Retail investors are the majority of buyers of WMPs, which offer higher interest rates than a bank deposit. But it isn't always clear what assets the funds are buying to finance those payouts. The industry publishes aggregated data on where WMPs tend to invest, but the disclosures of individual products can be vague. Overall, WMPs tend to invest in the industrial sector as well as industries related to local government and real estate, according to Fitch.
All of these are segments of the economy suffering from overcapacity.
Most WMPs -- as many as 74 percent -- don't carry the issuing bank's guarantee that investors will be made whole at the end of the product's term, which is usually less than six months, Fitch said. But even if the products fail to meet performance expectations, banks may choose to repay investors anyway to avoid the spectacle of mom and pop protesters in front of its branches -- something that occurred outside a Hua Xia Bank branch near Shanghai in 2012, according to a Reuters report.
When the WMP's performance isn't up to snuff, it can become a risk for more than just the issuing bank.