For China’s Banks, Wealth Management Booms Along with Risk Concerns

Banks compete to offer higher rates while regulators and analysts warn about transparency and maturity mismatches.

China Everbright Bank Lists On Shanghai Exchange

Pedestrians walk past a China Everbright Bank Co. branch in Shanghai, China, on Wednesday, Aug. 18, 2010. China Everbright Bank Co. rose as much as 19 percent on its debut in Shanghai after completing the nation’s second-largest initial public offering this year, as the stock market recovers from a three-month slump. Photographer: Qilai Shen/Bloomberg

Qilai Shen/Bloomberg

Lavender for girls and blue for boys. Those are the background colors on debit cards issued by China Everbright Bank under its so-called Little Banker plan, the first Chinese wealth management product designed just for kids.

The product, launched in June, offers a creative investment plan-cum-savings account to children less than 16 years of age. Those customers need to have an adult custodian and invest a minimum of 1,000 yuan a month ($159) to participate. China Everbright’s promotional materials say the product will invest in “intelligently managed” equity funds, and tout the plan as a way to save for college and teach children responsible money management.

Little Banker is just one example of how Chinese banks are becoming more creative in their efforts to expand the market for wealth management products. Banks, along with some securities firms, currently manage more than 7 trillion yuan in the sector, an amount that has quadrupled in less than four years. Some analysts predict the market will grow by a further 18 percent this year as retail investors look for alternatives to low-yielding savings deposits.

Regulatory pressure is rising, however, following a number of state media reports describing alleged fraud by rogue bank employees in selling bogus wealth schemes. Outside analysts have also raised warnings about risks in the sector. In December Fitch Ratings warned about a lack of transparency and said it appeared that some banks were using wealth management inflows to redeem maturing products and to back real estate developments that could be vulnerable to the country’s economic slowdown.

The China Banking Regulatory Commission, which previously had taken a laissez-faire approach to the sector, issued new rules in March aimed at preventing scams and limiting the exposure of wealth management products to high-risk investments.

Bankers have acknowledged weak supervision at some branches, and they have promised to toe the CBRC’s line by giving investors clear warnings and capping exposures to riskier investments. They insist, however, that the wealth management sector is fundamentally sound, and they continue to ramp up their marketing efforts. In the first five months of this year, banks rolled out more than 16,500 new wealth management products, up from about 13,100 during the same period in 2012, according to a June report by Fanhua Puyi Investment Management Co.

The wealth management sector sprung up a decade ago as a red-carpet service for the nouveau riche. Banks cater to their needs by including services such as no-fee, high-limit credit cards with their wealth plans. Most big banks operate plush private banking centers for these customers in big cities nationwide — some as discreet sections of regular branches, others as stand-alone offices replete with attentive doormen and hostesses serving green tea. Business is good. One of the nation?s largest private sector banks, China Merchants Bank, reported an 18 percent increase in this clientele in 2012, to 19,518 customers.

Since 2008, banks have widened the net considerably to target rank-and-file consumers with modest savings who want to earn more than term savings deposit rates and are not afraid of a little risk. Increasingly, banks tailor products to target specific groups, ranging from successful entrepreneurs to retirees to middle-class families and now to children. In a June 11 editorial, the state-run Economic Times called for banks to reach out to the nation’s vast — and generally poor — rural population by designing wealth products for low-income groups in farming areas.

What drives the business is something any Western hedge fund manager or pension trustee would appreciate: a search for yield. The benchmark interest rate for term savings accounts at the nation’s banks was 3.25 percent in June, while wealth products maturing in 79 days, a common maturity for the sector, offered annualized rates averaging from 4.3 percent at China’s biggest state-owned banks to 4.95 percent for plans offered by smaller banks controlled by city governments, according to a June report by Fanhua Puyi.

Buyers of wealth products can choose to put their money in a variety of investment targets, including public-infrastructure bonds, corporate debt, precious metals and stock funds traded on the Shanghai and Shenzhen exchanges.

The sector “does not have a unified standard” for investment portfolios, which “span the money market, bond market, stock market [and] commodity markets,” Wang Yan Xiu, business innovation director at the CBRC, said at a recent conference in Beijing.

Investors had 7.1 trillion yuan invested in some 32,000 active wealth plans at the end of 2012, according to the People’s Bank of China, up from 6 trillion yuan a year earlier and just 1.7 trillion yuan at the end of 2009. The CBRC says nearly two thirds of that money came from retail investors; institutional and private banking clients contributed the rest.

In June 2012 Guo Shuqing, then chairman of the China Securities Regulatory Commission, hailed wealth management as “a promising sunrise industry” and expressed hope that it could grow to some 40 trillion yuan, or half the size of the banking system"s deposit base.

Regulators have turned more cautious lately, though. Xiao Gang, who replaced Guo as head of the CSRC in March, has voiced strong concerns about some banks’ wealth management products. In October 2012 Xiao, then chairman of state-run Bank of China, wrote an op-ed in the China Daily newspaper claiming that some institutions’ offerings were “fundamentally a Ponzi scheme” that relied on cash from new investors to pay off maturing products. The bank has no such reticence about its own offerings, apparently. Bank of China, the nation’s fourth-largest bank by assets, introduced more new “investment models” for wealth products — 508 — in 2012 than any other bank, according to Fanhua Puyi. State-run Agricultural Bank of China was a distant second, with 285.

In late January Yan Qingmin, assistant chairman of the CBRC, cited three main concerns in a speech at a forum on the wealth management sector. He said banks were making inadequate disclosures in marketing wealth plans, particularly so-called pools of funds that invest wealth management inflows in bonds of the sponsoring bank. Banks also were creating maturity mismatches by placing funds of short-term products into long-term investments. And Yan acknowledged that regulatory oversight had failed to keep pace with the sector’s rapid development.

Two months later the banking regulator backed up that talk with some new rules designed to rein in risk and increase transparency for investors. One rule sets a 35 percent ceiling on wealth management products’ exposure to nonstandard debt instruments such as credit assets, trust loans, acceptances, letters of credit and accounts receivables.

Separately, the CBRC’s branch in Shanghai ordered banks to stop selling wealth management products from the teller windows that handle deposit accounts. The move appeared to be a response to widely publicized losses at a Shanghai branch of Huaxia Bank, a publicly listed bank controlled by the state that includes Deutsche Bank as its leading foreign shareholder, with a 17.4 percent stake. The bank blamed a rogue employee for creating and selling a phony wealth management plan without the bank’s permission, causing investors to lose some 100 million yuan last fall. State media said the incident was the first failure of a wealth management product. Huaxia later agreed to cover some of the losses. Since then, reports have surfaced of other wealth management losses at branches of several leading banks.

So far, these incidents have done little to dent the market’s growth, or banks’ ambitions. Banks insist the problems have been isolated and promise to beef up employee supervision and better educate investors, marketing plans more clearly as investment products that carry market risk rather than guaranteed savings deposits. Meanwhile, the flow of new products continues unabated.

Regulators have made clear that their stepped-up supervision is aimed at protecting a growing sector, not squashing it. The CBRC’s Wangchgd said the regulatory agency strongly supports the wealth management sector as well as banks’ efforts to develop new market niches. By making sure that products offer “specific innovations” to investors, the regulator seeks to “promote the sustained and healthy development of the wealth management business for China’s banking industry.”

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