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WHOLESALE BANKING | Staff Reporter, China
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How risky is the rapid growth in wealth management products for Chinese banks?

The outstanding balance of WMPs rose to USD3.6trn at end-2015.

The continued rapid growth in wealth management products (WMPs) invested through Chinese banks could be a key source of credit and liquidity risk for certain financial institutions, says Fitch Ratings. The fast rise in WMPs is closely connected with the continuing growth in domestic credit, and they are accounting for an increasing proportion of funding at Chinese banks especially midtier institutions.

Recently released data showed the outstanding balance of WMPs rising to CNY23.5trn (USD3.6trn) at end-2015 from CNY15trn a year earlier, with an average of over 3,500 new products issued every week during the year.

Here's more from Fitch Ratings

Nearly three-quarters of these are non-guaranteed WMPs; and over 60% of funds invested in WMPs come from retail investors, attracted by the higher rates of return than that for ordinary deposits.

Importantly, they continued to grow faster than bank deposits, resulting in WMPs equating to 16.8% of system deposits at end-2015, up from 13.6% at end1H15. As a result, banks with large sales of WMPs relative to deposits could face liquidity and funding pressures in the event of renewed market volatility.

Fitch believes that the most common source of WMP repayment is through the issuance of new products, resulting in persistent rollover/payout pressure on banks. WMP issuance during 2015 topped CNY158trn from CNY114trn in 2014 highlighting the high churn rates of these products. When banks are unable to roll over, they have to either draw on their onbalance sheet liquidity or borrow money from the interbank market to meet payouts.

Midtier banks are the most vulnerable. The outstanding balance of WMPs issued by midtier banks surpassed that of state banks for the first time in 2015, accounting for a 42.2% market share versus 36.9% for state banks. Notably, outstanding WMPs accounted for over 40% of deposits for midtier banks versus just 15% for state banks.

This is a key source of credit and liquidity risk for midtier banks, given their thinner liquidity profiles and weaker lossabsorption capacity. The Viability Ratings of China's 10 midtier banks range from 'bb' to 'b', reflecting varying degrees of weak intrinsic strength compared with larger state lenders.

There are other risks from WMPs beyond liquidity. WMPs are typically managed directly by the banks, and issuance is often used by banks to offload assets from their loan books. Most products reside offbalance sheet for much of their duration, and are tied to hidden offbalance sheet pools of assets.

They have been used by some banks to support profit while masking assetquality risks and leverage. In this regard, they can be viewed as a hidden second balance sheet, but with poor disclosure and few reserves or capital to cushion losses. Therefore the growth in WMPs could add to bank credit risks, especially with a history of banks bailing out investors in failed WMPs.

Banks have also been increasingly investing in WMPs on their own books in recent years, and capital invested in WMPs has been channeled into equity markets and forms of mezzanine financing in addition to traditional fixed return asset classes such as corporate bonds. This could add to the aforementioned credit and liquidity risks by raising bank exposure to capital market volatility. 

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