Chinese Savers Keep Pouring Cash Into These Risky Investments

Alarm bells are ringing as Chinese citizens keep pouring their savings into wealth-management products, a market that has tripled to more than $4 trillion in a little over three years. Like mortgage-backed securities were in the U.S., these products are building blocks of a shadow-banking system that exists largely off banks’ balance sheets. In China, a history of bailouts has persuaded many investors that WMPs are implicitly guaranteed by the issuing bank or the state. The People’s Bank of China has taken note, as have other regulators.

Issued by banks, WMPs have emerged as a key tool for lenders to attract funds. Investors are lured by yields of 3 percent to 5 percent, compared with 1.5 percent for one-year bank deposits. The WMPs invest in everything from bonds to property and can be exposed to struggling industries like mining. The banks can keep the WMPs off their balance sheets provided the products are not principal-guaranteed, which most are not. They can also hand over the products to non-banks to manage in return for a predetermined interest rate.