How China’s Banks Risk Wealth Management Cash

Call it the Great Wealth Rollover of China.

The nation's banks have been introducing new wealth management investment products at a blurring pace over the past year, dazzling upper-class clients with fat catalogues of high-yield investment opportunities.

Yet Caixin has learned from bank and regulatory sources that much of the wealthy investor cash pouring into short-term, high-risk products is being rolled over by banks to provide fresh financing for long-term investments, including unfinished property developments, local government financing platforms, railway projects and private equity.

The rollover game is providing badly needed funds for infrastructure projects for which credit has dried up over the past year with every notch of monetary tightening by the central government. It's helped offset the government's rising bank deposit reserve requirement, for example, which has crimped bank lending.

At the same time, some industry experts warn, the banks may be fobbing off long-term investment risks to their wealth management clients.

By offering the well-to-do a dizzying variety of investment products along with promises of near-double-digit returns, some fear banks are leading wealth management clients into the same trap that caught U.S. investors before they were fleeced during the 2007 subprime mortgage crisis.

About 9,000 types of wealth management products were available to Chinese investors during the first half of 2011, double the number offered in 2010. Capital turnover for these products topped 8 trillion yuan between January and June.

One risk management executive at a commercial bank told Caixin that wealth management product risks in China are far lower than those faced by subprime mortgage investors in the United States. But others say Chinese products are often too good to be true.

"Some products are expected to yield close to 10 percent," said one bank executive. "But how are banks getting access to so many high-return investment channels?"

China's banking regulators have taken note of the rollover game and are trying to reign in risk and prevent a potential wealth management meltdown. But the players are already firmly entrenched.

Money Maneuvers

Some bank critics say wealth management products have been used to build a shadow banking system beyond regulatory reach. Others warn of possible Ponzi schemes, or call the race among banks for wealthy clients maddening.