Chinese banks’ wealth management units are suffering a crisis of confidence as mum-and-dad investors have fled the sector after products they thought were risk-free suddenly dropped in value.
Volatile markets and a stream of redemptions at the end of last year pushed lenders’ managed assets down by more than Rmb1.36tn ($200bn), raising concerns about future growth for a business that supplied banks with a steady stream of fees and crucial capital for corporate bond issuers.
Many conservative investors panicked when bond yields surged and prices dropped as China suddenly abandoned its zero-Covid policy after nearly three years of lockdowns and other growth-sapping virus curbs.
The offerings in the Rmb24tn industry — mostly bonds, money market funds and other fixed-income investments — had long been seen as risk-free with the promise of relatively high returns.
Then, China’s wealth market last year was for the first time required to report mark-to-market losses to improve transparency. Banks were given several years to adopt the new rules, which were introduced in 2018 to address issues concerning products that invested in local government and property debt with little disclosure on real-time prices.
“It was the first time many households realised that WMPs (wealth management products) were not true guaranteed returns and could indeed lose money, prompting many to pull out their funds and park them in safer bank deposits,” Zhang Xiaoxi, analyst at Beijing-based Gavekal Dragonomics, wrote in a research report this month.
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Investors are now slowly trickling back into wealth management products, but choosing those with lower risk and volatility and retreating from asset classes that come with higher yields — and risk.
This trend “is likely to leave a substantial impact on private companies’ access to financing”, Zhang warned.
Nearly half of the wealth management market invests in corporate bonds. By December, more than 20 per cent of all products were worth less than their face value. In February, Standard Chartered warned that “unprecedented” losses for wealth management products would likely mean slower growth in the industry, and weaken demand for bonds this year.
For banks, the shift out of fee-earning assets to interest-paying deposits among investors seeking a safe place to park their cash means more stress on their own finances.
For China Merchants Bank the cost of servicing those savings accounts jumped as deposits soared by a record 18.7 per cent to Rmb7.54tn.
Meanwhile, at its wealth management unit — the biggest among mainland banks — assets fell 3.96 per cent in a year to Rmb2.67tn, while fees and commissions dropped 16 per cent to Rmb30.9bn from a year earlier.
With many investors still viewing wealth-management products as capital guaranteed, the sector’s growth will be under strain, said Wang Liang, president and chief executive of China Merchants Bank.
“In this circumstance, we cannot be ambitious about size and growth speed [of wealth management products],” he told a late March earnings conference.
In all, in 2022 wealth management assets collectively dropped by more than Rmb1.36tn at 21 Hong Kong-listed Chinese banks — including Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China — according to Nikkei Asia calculations.
Foreign companies operating tie-ups with Chinese banks have not been spared, either.
French asset manager Amundi had a net outflow last year of €3.9bn ($4.27bn) from its joint venture with Bank of China Wealth Management as investors yanked out their funds. The venture’s total assets under management fell by €4bn to €7bn last year.
“In China last year, our activities saw a pause,” Valérie Baudson, chief executive of Amundi, told a February earnings call.
But she offered cautious optimism as China reopens after dropping its zero-Covid policy late last year.
“Considering the situation and looking at 2023, of course, we welcome extremely positively, like everybody else, the fact that China reopens,” Baudson said. “And it will clearly make things easier, but I think we need to remain cautious on the rhythm and the pace. It will not happen just like that.”
A version of this article was first published by Nikkei Asia on April 20, 2023. ©2023 Nikkei Inc. All rights reserved.
