WMP boom could hurt China’s weaker economy

Sales of wealth management products in China jumped 43% to US$1.90 trillion during the first half of the year.

The surge in WMPs, however, has given rise to concerns that these products could destabilize China's banking system. Bank of China, China Merchants Bank, Industrial and Commercial Bank of China and Huaxia Bank are the top five spots in terms of WMPs issued.

Analysts believe the surprising popularity of WMPs among high net worth individuals this last year is creating hidden risks in China's banking system.

They explained that a bank’s cost of funds rises when customers jettison ordinary deposits for higher yielding WMPs. A bank’s funding base becomes less stable since customers tend to chase the highest yields by frequently transferring funds between competing products.

Disclosures accompanying the sale of such products are often incomplete. Analysts are concerned that banks may be using the proceeds to fund risky loans to real estate developers or local government financing vehicles.

"Right now most bank wealth management products don't use a normal asset management-type operating model," Xiao Fang, lead author of a report on WMP by CN Benefit, a wealth management consultancy based in Chengdu.

The report showed that 52% of all WMPs invest in relatively safe bond and money market instruments. On the other hand, less than 1% of products are based on loans and corporate, the report said.