(Bloomberg) -- Chinese regulators appear to be winning their war against risk in one of the more dangerous corners of the country’s shadow banking industry -- the so-called wealth management products that banks buy from each other in a search for easy profits.
Interbank holdings of WMPs more than halved last year, to 3.25 trillion yuan in December from 6.65 trillion yuan a year earlier, according to the annual report of China Central Depository & Clearing Co., an industry body. That suggests higher interest rates and increased scrutiny by regulators are deterring Chinese banks from their previous practice of using cheap interbank borrowing to invest in each others’ higher-yielding WMPs.
Some have warned that the interbank market for the products was an accident waiting to happen, vulnerable to the same kind of collapse of confidence that struck U.S. and European banks during the 2008 financial crisis. The failure of one institution could quickly spread to others in a market where banks were buying increasing quantities of each others’ WMPs.
The interbank WMP market will continue to contract this year, as China keeps interest rates high as part of its campaign against financial-sector risk, according to analysts from Shenwan Hongyuan Group Co. and Macquarie Group Ltd. Higher rates make it less profitable to use interbank borrowings to invest in WMPs. And many were deterred after the China Banking Regulatory Commission ordered banks to “self-review” their interbank and shadow banking exposures in April, widely seen as a move to rein in the lenders.
"The incentive is no longer there," said Dexter Hsu, a Taipei-based analyst at Macquarie. "Using deposits, which are increasingly hard to come by, to invest in interbank WMPs is a losing bet."
The CBRC and other regulators are working closely in an unprecedented campaign to curb the $16 trillion shadow banking industry, of which WMPs issued by banks are the largest component. Another risky area that is contracting rapidly is some $3.8 trillion of so-called trust products, which have been a popular way for debt-ridden property developers and local governments to raise funds. That market has been hit by delayed payments as wealthy Chinese savers turn sour on the products.
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Despite the retreat in the interbank sector, the wider WMP market continued to grow last year, albeit at a slower pace, according to the industry body. Strong appetite among individual investors helped the outstanding balance of WMPs rise 1.7 percent to 29.5 trillion yuan in December from a year earlier. Still, the escalating clampdown on all types of asset management products slowed the growth rate markedly from an average compound rate of about 50 percent between 2013 and 2015.
Factors such as the government’s determination to eliminate implicit guarantees on WMP returns in coming months suggest sales of the products will slow "substantially," Daiwa Capital Markets analysts said in a note this week.
To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net.
To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Andrew Monahan
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