May 22, 2017 07:05 PM

Banks Cool Appetite for Wealth Management Products

(Beijing) – China’s crackdown on risky lending practices that could threaten financial stability are starting to have an effect, with anecdotal evidence showing banks are shifting their focus away from investing in products sold by other lenders, especially wealth management products (WMPs).

Analysts and bank employees told Caixin that there has been a notable decline in the amount of WMPs lenders are selling to each other, and especially in the issuance of products aimed at raising money to refinance maturing ones.

The most recent report by the China Banking Wealth Management Registration System, released on May 19, showed that outstanding interbank WMPs almost doubled last year to 5.99 trillion yuan ($871 billion). They accounted for 20.6% of all outstanding WMPs at the end of December, 7.84 percentage points higher than at the beginning of last year.

Official figures for the first quarter have not yet been released, but one analyst estimated that outstanding interbank WMPs may have declined by around 3 percentage points since the end of last year due to regulatory pressure on banks to unwind their investments as part of the government’s campaign to force financial institutions to cut their leverage.

The authorities were especially concerned that banks were using interbank investment to skirt lending restrictions and load up on debt to invest in other financial products. It was hard for regulators to keep track of the chain of investments and they feared such practices were leading to excessive risks.

The regulatory frenzy of the last two months, two increases in money-market lending rates this year, and the central bank’s squeeze on interbank liquidity have made it more expensive for banks to get funds from other lenders and to buy investment products from other financial institutions.

“Last year the average cost (of raising funds through interbank WMPs) was less than 4%. Now it’s more like 5% and growing,” said one person who works in the interbank department of a joint-stock bank.

More Expensive

The difference between interbank borrowing costs and the cost for banks to borrow from their own depositors has widened sharply as a result. The benchmark one-year deposit rate set by the People’s Bank of China is just 1.75%, and although smaller banks offer slightly higher rates to attract customers, it’s still much cheaper for them to use the money deposited by savers to fund their lending and investment than using funds from interbank WMPs.

“The asset management departments of many banks have been shifting their strategies and allocating more resources to their retail banking departments, including offering higher incentives to sales people” to attract deposits, the bank employee said, adding that his company has also cut commission rates for sales people in the interbank department.

The growth in interbank WMPs has been too rapid over the last two years and is unsustainable, experts told Caixin. The growth rate has to slow down, they said.

Outstanding interbank WMPs amounted to only 490 billion yuan at the end of 2014, and accounted for only 3.25% of overall WMPs. But by the end of 2015, they had surged by 500% to 3 trillion yuan, according to previous annual reports from the China Banking Wealth Management Registration System.

The 2016 annual report published last week didn’t provide monthly data on interbank WMPs, so it’s unclear whether growth hit a speed bump towards the end of year as the central bank signaled its intention to tighten supervision over interbank WMPs.

Zhou Guannan, an analyst with Huachuang Securities, said a bigger threat to interbank WMPs will come if the regulator fleshes out previously announced plans to restrict banks’ purchases of WMPs offered by other financial institutions by imposing tougher capital provisioning requirements on those investments. Such a move would likely dampen demand for these products which are mainly held off the balance sheets of the banks precisely to avoid the stricter capital reserve provisioning required for WMP held on banks’ balance sheets.

Contact reporter Wang Yuqian (

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