[Over the last five years, Chinese investors have plowed at least $2.8 trillion into buying such funds from banks alone. After quintupling since 2011, these investments, known as wealth management products, now total an amount roughly equal to more than one-third of the country’s annual economic output. Their growth has increased as China’s economy has slowed.]
By Keith Bradsher
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On paper, the Guangfuli
neighborhood is a real estate investor’s dream: a plot in the middle
of one of the world’s
most expensive property markets. But in reality, hundreds of people
who live there have
refused to budge from their ramshackle
homes. Credit Aly
Song/Reuters
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SHANGHAI — The deal could be hard to resist.
A Shanghai investment firm is offering a fat
return of up to 10 percent a year, handily beating both the local stock market
and the paltry payouts from bank accounts. It requires a minimum deposit of
about $15, making it accessible to just about anyone. Investors can pull out in
as little as seven days. Best of all, the money is guaranteed.
There is just one catch: Investors know
surprisingly little about what they are buying.
The firm, State Gold Treasure, said the money
would be plowed into a real estate company building a luxury serviced-apartment
complex here in Shanghai. But it will not release details, including the
complex’s address.
The offering is just one of a spate of barely
regulated, highly opaque investments that are posing a growing threat to the
Chinese financial system. As the country’s economy slows, experts increasingly
worry that many of the investment funds could fail — and the government may not
know how to handle the shock to its financial system.
Over the last five years, Chinese investors
have plowed at least $2.8 trillion into buying such funds from banks alone.
After quintupling since 2011, these investments, known as wealth management
products, now total an amount roughly equal to more than one-third of the
country’s annual economic output. Their growth has increased as China’s economy
has slowed.
That is just the funds distributed by banks.
Reliable data on wealth management products sold by other types of firms, like
State Gold Treasure, is hard to come by.
The problem for China is that a big chunk of
the money is going into troubled industries like construction and real estate.
Further slowdowns in those areas could result in major blowups.
Banks also increasingly use the funds to
raise money, instead of more stable deposits. The extra investment cash allows
banks to make loans at a much faster clip than their deposits alone would
allow. But if investors suddenly demanded their money back, banks could be in a
financial bind.
The Chinese government so far has stepped in
to stop big meltdowns of wealth management products, to avert ripple effects
and forestall investor anger. But not all investors have been spared.
Li Wenyuan, a doctor in Beijing, says she
invested almost $140,000 last year in a wealth management product linked to a
steel company. After the company ran into difficulty, she was repaid less than
$2,000. She had planned to use the entire original amount to send her son to a
high school in Canada, where the air is cleaner and he would have a chance to
improve his English.
“It’s quite a big loss for my family,” she
said. “We are still able to provide for ourselves. Still, it’s a lot of money
and I doubt I will ever get it back. I am worried.”
Wealth management products are part of a huge
but shadowy system of unregulated investments and underground banks that many
Chinese people depend on for the loans that keep their businesses humming.
Increasingly, the debate inside and outside China is focusing on what will
happen if that system falls apart — and how quickly the government might be
able to respond.
“There is a risk building up in this regard,
and on top of that, the tricky issue is that there are many triggers that could
wake up this sleeping lion,” said David Daokui Li, a prominent Tsinghua
University economist who is a member of the Chinese central bank’s monetary
policy committee. “Most likely, this issue will emerge as a crisis. The
question is whether it is a small crisis or a big crisis.”
China’s wealth management products are
neither stocks nor bonds nor mutual funds. A typical wealth management product
offers a fixed rate of return over a set period. Many Chinese investors treat
them like bank savings deposits because many are sold by state-controlled banks
that give the funds the appearance of government backing.
But unlike bank deposits, they are uninsured.
They are also typically structured so that the banks are not responsible if the
investments fail.
Among the biggest issuers of wealth
management products are hundreds of banks and other financial institutions in
poor, inland provinces. These banks are under intense pressure from provincial
political bosses to keep lending and help sustain big employers like
state-owned enterprises, at a time when the entire country’s economy is
slowing.
To raise money for large-scale lending, banks
have ramped up issuance. They sold 187,000 separate wealth management products
by the end of last year, up 56 percent from a year earlier, according to
official statistics.
Technology has made it easier for firms other
than banks, like State Gold Treasure, to sell the products online and through
smartphone apps. “In the past, you’d need to go to the bank to open an account
or open an account at a certain fund company,” said He Zhirui, a finance
company worker in Beijing who also invests in wealth management products. “Now,
with the apps, you can simply upload your personal ID and purchase wealth
management products right away online.”
State Gold Treasure, known as Guojinbao in
Chinese, has its wood-paneled offices on the 71st floor of the gleaming
Shanghai World Financial Center, which has a large statue of a Chinese god of
wealth in the lobby. On its website, the company says investors are protected
by a “seven-layer guarantee mechanism” and promises that all investments will
be repaid in full.
But the fund does not say who is guaranteeing
the funds. The company declined interview requests and to make officials
available for comment during a visit to its offices.
The proliferation of wealth management
products has drawn concern from regulators. In May, China’s banking commission
warned that the business was plagued with problems, including unauthorized
products.
Regulators are also considering new oversight
rules. The goal, the commission said in response to questions, was to
“facilitate a standards-based, healthy and sustainable development” and to
“prevent risks.”
The shift in money away from bank deposits
leaves China’s financial system on less solid footing. China withstood the
Asian financial crisis in 1997 and 1998 and the global financial crisis in 2008
and 2009 in part because its financial system depended on highly stable
household and corporate deposits parked mainly at four huge,
government-controlled banks.
But smaller banks combined are now almost as
large as the four main banks combined. Wealth management products account for
up to a third of money raised at many midsize and smaller banks.
Mr. Li, the central bank adviser, and other
officials and economists say the Chinese government has the resources to cover
big losses if wealth management products fail. They also say China’s
increasingly tough enforcement of limits on sending money abroad will ensure
that enough cash remains in the country in the event of a big failure.
“With the Chinese system, it’s easier to deal
with a liquidity issue — the money can’t go out,” said Chang Chun, the
executive dean of the Shanghai Advanced Institute of Finance at Shanghai Jiao
Tong University.
But some specialists in Chinese finance say
that serious problems could appear faster than expected. They could also lurk
in unexpected corners unnoticed by Chinese regulators, much less international
investors.
“It’s going to happen,” said Christopher
Balding, an associate professor of finance at the HSBC Business School at the
Peking University Shenzhen Graduate School, “when a firm goes bust that you’ve
never heard of, or in a city you’ve never heard of.”
Owen Guo contributed research from Beijing.