Many of the mainland’s domestic wealth management products look like time deposits to investors, but they are not necessarily guaranteed by the banks that issue them, wrote Doyle in a recent commentary.
Most Chinese investors are attracted by the high interest rates and they do not know that WMPs are not real deposits.
“The underlying assets are often real estate and given the Chinese real estate market has experienced a sharp downturn in recent months, the pressure on Chinese banks to deliver the stated return on the WMP is growing every day.
“Chinese banks have relied on WMPs to increase their deposit base. Banks then take those deposits and make real estate loans. It’s a vicious circle of doom because the Chinese property market will eventually correct.”
Chinese wealth management products are worth 14 trillion yuan, an amount that is roughly the same size as Brazil’s entire economy ($2.2 trillion).
“Should investors begin to lose confidence in the banks and withdraw from WMPs en-masse, a liquidity crunch would be the most likely scenario.
“Because of the scale and prevalence of WMPs, banks would be expected to cover losses and pay investors principal plus interest on products that had been guaranteed.
“These products are too big to fail. The question is to what degree this would impact the financial system and whether the smaller banks could handle a run on wealth products.”
