Chinese risk awareness found wanting on wealth products

The recent case of a retail investor losing Rmb1 million is a vivid example of how ill-prepared Chinese people are in terms of making investments in wealth management products, say analysts.

The recent loss of Rmb1 million ($160,000) by a Chinese investor is the latest example of a lack of risk awareness in WMPs and highlights bigger concerns about who will pay out if a wealth management product (WMP) fails.

An investor with the last name of Lee filed a law suit against China Minsheng Banking, a Beijing-based commercial bank, asking for Rmb1 million from the bank after buying its WMPs in June 2012, according to two local newspapers earlier this month.

Lee said the bank told him that the manager who persuaded him to buy some WMPs had committed suicide after the products matured.

Local media reported that Lee’s investment was not run from his own banking account but the manager’s. The bank told Lee that it had no idea of the sale of the products so it would not be responsible for the losses, according to local media.

A spokesman with CMB told FinanceAsia that the WMP investment files submitted by Lee are counterfeit. CMB is waiting for the court’s verdict, said the spokesman.

Nevertheless, analysts said the case, a small one involving only one retail investor, is a vivid example of how ill prepared Chinese investors are for making investments in WMPs.  

“If returns of the products are high, investors should be very careful because usually they cannot guarantee principle once run into problems,” says a Hong Kong-based wealth account manager with a Chinese bank.

Lee bought 6-month products with a minimum entry of Rmb1 million with a yield of 12.3%, according to media. The yield for principle-guaranteed WMPs sold by Chinese banks generally ranges in 4%-6%.

Chinese investors, especially retail investors, favour WMPs, including trust products and short-term investments, because they have few investment alternatives. They are not satisfied with the bumpy stock market, nor with the low deposit rates from banks, according to analysts.

Ironically, many also still consider WMPs safe investments as banks were historically controlled and backed by the Chinese government. Some investors believe that if some product is defaulted, the bank should be the one to be responsible.

Another incident came to light in May, on a product issued in 2011 by Bank of Communications, in which investors found had lost 20% in principle.  Investors complained to mainland regulators to ask for compensation and the case is under negotiation.

“Ultimately the risks taker is investor. Bank is just a passing-through conduit. Banks would not take much risk,” said a head of China investment banking with a global bank.

Retail investors have to have the concept that the country will allow some defaults to let people realize the risks in investments in WMPs.

“It is inevitable that some WMPs may not make as much money as they appeared to be at the beginning. That’s the nature of investments,” said the banker. 

Compared to retail investors, institutional investors may be more professional in risk control. However, once WMPs default, they may have less power in complaining to media and government because they are professional investors who are expected to be knowledgeable in making the right investment decisions, according to Hu Bin, a vice president and senior analyst with Moody’s.

Although WMPs are sometimes problematic in other markets globally, the issue is particularly acute in a country seeing immense growth in alternative investments.

As of the end of June, the WMP industry was worth Rmb9.08 trillion, according to the China Banking Regulatory Commission. The growth rate of shadow banking, the majority of which WMPs account for, has hit 75% and 67% over the past two years respectively, according to Moody’s.

The country’s watchdogs, which include CBRC and Securities Association of China, have taken action to tighten regulation on WMPs sold by banks.

One main concern is the transparency of the underlying assets behind a WMP. In May, the CBRC put a cap on WMPs that are backed by non-standardised debt assets – non-tradable credit related assets - to better match assets and liabilities of WMPs.

Analysts are worried that, if those assets can’t cover the loss WMPs make in any default, there will be a chain effect that will lead to a systematic dysfunction of the whole banking system.

“Banks should control the compliance process. They should realize that the risks arising from soured WMPs include not only financial loss, but also legal liabilities and reputational damage,” said Moody’s Hu. 

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