Implied guaranteed returns for Reits and other asset-management products are holding back the opportunity for China to develop a truly big and diverse investments universe, a conference heard.

The comments by Wu Xiaoling, vice-chairwoman of financial and economic affairs at the National People’s Congress, also contained criticism of financial institutions' apparent timidity.

Speaking at a panel moderated by AsianInvestor’s Jame DiBiasio, Wu said the government’s inability to end such perceptions – and the misleading manner in which product salespeople imply such state guarantees exist – has already cramped the development of asset management in China.

Wu, the former vice-governor of the People’s Bank of China, also blamed financial institutions for lacking the courage to file lawsuits against clients who demand full repayment for risky investments that have gone wrong.

Wu was speaking at last week's Boao Forum for Asia, the government-supported annual conference on Hainan Island for politicians and business leaders. Senior Chinese officials often use Boao’s platform to indicate political decisions.

President Xi Jinping opened the forum by championing China’s regional infrastructure and investment initiatives, and emphasising that the nation’s prosperity depended on more than just a high rate of GDP growth.

In the financial sphere, the liberalisation of asset management among all types of financial service providers, on top of a general rise in wealth, has sparked a boom in investment products. Chinese regulators see this as a chance to wean people out of trust products and into new ones that are not assumed to have state backing. But that will require major changes to how the industry is supervised.

As Wu acknowledged, “The first step is to clarify the roles of clients and managers, while managers should not be responsible [i.e. legally culpable] for capital and return.”

Wu continued: “Investors are the first ones to bear risk. If a product guarantees capital and interest, it is actually just a kind of savings product.”

Creating true investment risk is the only way to develop skills within the industry that can enable Chinese firms to compete globally.

“Without exposure to risk,” Wu said, “[fund managers] will not be able to analyse risk or price value.” Ending implicit guarantees, she said, “will be the start of a healthy financial market.”

With shaky assumptions about government backing, investors have not learned how product structures work and don’t take risk seriously. Distributors and financial institutions have relied on misleading sales pitches but are unwilling to challenge investor claims because they fear it would damage their reputation, Wu said.

One emerging concern has been over China's internet finance industry, which allows individual investors to buy investment products through an online platform. Fund manager Tianhong Asset Management has successfully tapped money by partnering with Alibaba to launch Yu'E Bao, now the largest money market fund in China.

“Many investors have not read the [online] product structure and risks, so who should bear the risk and liability?” asked Wu. The biggest question was whether distributors should not merely consider investors' online investing experience, but also differentiate between clients and sell products at an appropriate risk level, she added. 

Distributors claim they too want things to change, but they would also like to see the composition of the investor base mature.

Zhang Hongli, vice president of Industrial and Commercial Bank of China (ICBC), China’s biggest bank and biggest distributor of funds, said that while he agreed the government should allow more defaults, discipline had to be enforced only gradually.

“To allow more institutional investors and public pension funds to participate in the market will be important,” he said.

Trust companies and bank-sold investment products are often pitched as ‘implicitly guaranteed’ or to have ‘guaranteed rigid cash payments’. In other words, defaults by underlying assets (often real estate) would be covered by the issuer or the bank, not by an investor.

Regulation is fuzzy on the matter. There have been numerous cases of local governments bailing out trust schemes, or intervening to get a bank or other entity to do so. For example, in April 2014, China Credit Trust was on the brink of default. It was finally rescued via an asset swap organised by the local government.

There has been one corporate bond default in China so far, that of Shanghai Chaori Solar. So far no Chinese entity with overseas debt has been allowed to default.