China’s banking regulator has launched a nationwide probe on the pooling of wealth management product-linked assets at several banks. Already, some wealth funds are said to be at risk of defaulting, sparking fears of a crisis similar to the 2008 U.S. subprime lending crash.
According to a report by the official China Securities Journal, the inspection by the China Banking Regulatory Commission is focused on products that channel depositors’ money into a pool of assets, rather than a single account. Such products are not transparent and could create room for illegal operations, the Journal added.
The CBRC in 2011 released a policy requiring banks to stop pooling money from different wealth products and using the funds to invest and repay old loans. The collective management, it added, makes it almost impossible to access the performance of each wealth product because gains and losses are shared across the board.
However, not all banks have complied with the CBRC’s tighter rules and officials say the size of capital pools at some banks had grown even bigger since the new rules were put in place.
China has strengthened its supervision of the fast-growing wealth management sector since late 2011, when one investment product sold through Hua Xia Bank failed to pay its annualised return. The bank, a mid-sized lender partly owned by Deutsche Bank, said the product was sold by an employee without proper authorisation.
It is not yet clear how many, and to what extent, others have defaulted, but analysts say that if more wealth management products default and generate headlines like the Hua Xia case, a crisis in confidence could ensue, sparking a run on the wealth product market.
"Some of these products won't be able to generate enough money to pay back investors," said BofA-Merrill Lynch China strategist David Cui. "The issue is, at a certain point, if it gets to a certain scale, you can no longer cover up the losses. Then we may have a systematic risk on our hands."
China's wealth products have been likened to the U.S.-invented collateralised debt obligation. That product pooled together loans, mostly American mortgages, and sold them to hedge funds. When home owners defaulted, and hedge funds stopped buying CDOs, banks were left with packaged loans they couldn't sell. That helped cause the 2008 financial crisis.
Beijing has until now tolerated wealth products because they offered alternative investment opportunities and channelled credit to industries in need.
Speaking at the sidelines of the National People’s Congress in Beijing last week, CRBC chief Shang Fulin told reporters that the organisation will take measures to prevent shadow banking risks from spreading to the banking system.
As banks' burgeoning financial product businesses grow rapidly in China, it is inevitable that problems and risks will emerge, said Shang. But the CBRC, together with commercial banks, is considering strictly supervising the design, sale and capital flow of financial products, he added.