May 10, 2017 06:54 PM

Closer Look: As China’s Growth Cools, Wealth Management Products Boom

As China’s economic growth cooled, some domestic companies tried to maintain ground by accepting government subsidies, selling real assets such as property, or investing in the stock market. Now, Chinese publicly listed firms are increasingly trying to boost their incomes by buying so-called wealth management products (WMPs).

WMPs are higher-yield, short-term investments typically sold by commercial banks. In the 12 months ending Wednesday, 9,641 publicly traded companies listed on China’s A-share market moved 887.2 billion yuan ($128.5 billion) of capital into such financial products, according to data compiled by Chinese financial information provider Wind. That was a whopping near-46% jump over the same year period ending May 10 of last year.

Six of the A-share listed companies each bought more than 10 billion yuan worth of WMPs. The companies included Tianjin Tianhai Investment Co. Ltd., Yanzhou Coal Mining Co. Ltd. and Beijing Sanyuan Foods Co. Ltd.

The run-up in purchases of WPAs is happening at a time of growing concern about bubbles in the economy, largely due to a binge on credit over the past two years. This has sent property prices to a record high. Meanwhile, the so-called real economy—the part concerned with actual production of goods and services instead of investment in the financial markets—has remained sluggish. The result is that it is hard for companies to make quick and big profits through corporate expansion alone.

WMPs also have benefitted from the perception that they are less risky than pure stock investments.

In addition, public companies have been holding substantial amounts of idle cash. In 2016, public companies raised 2.11 trillion yuan through initial public offerings (IPOs) and private offerings to a small number of investors, known as private placements. That was up 31% from a year earlier, according to Wind data. About 58% of the capital that public companies invested in WMPs was raised via such financing channels but had been left “wasted” due to slow business expansion.

WMPs have been especially attractive to companies in sectors such as manufacturing that are especially hard hit by financial slowdowns. Given the challenge of upgrading their business models during such times, companies look to WMPs to satisfy investors, said Dong Dengxin, a finance professor at Wuhan University of Science and Technology.

The result is that such financial products have become a significant vehicle for some public companies to derive investment returns. But if investment is done in a risky or extreme way, it isn’t sustainable for companies to expand their incomes, and investors will shun the shares of such firms. After all, investors put more value in companies that have better prospects of business growth, than in those that seek short-term gains alone.

The author is a staff reporter with Caixin Media.

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