As China’s banking regulator seeks to limit the risk of wealth management products (WMPs) in the banking sector, some market participants are looking to clarify what they see as the major issues: chiefly liquidity and transparency.

Banks are reportedly now required to finish examining and – where needed – make changes to their capital-pool WMPs before April. If they don’t satisfy the China Banking Regulatory Commission (CBRC), it might consider halting the firm’s WMP business.

The most recent requirements include that: banks must conduct internal risk assessment on capital-pool WMPs; non-capital-guaranteed products with floating returns should not be in the ‘capital pool’; banks must strengthen the risk control on products; and risk management departments must run stress tests. 

This call from the CBRC comes after its initial foray into the WMP debate in early December, when it said WMPs should not fall under the country's shadowy private-lending system.

‘Capital pool’ refers to the money banks have raised from selling an array of WMPs that they have invested into multiple asset classes from low to high risk, from bonds, trusts and deposits to high-yield projects with different maturities. The pool’s size is maintained by continuously rolling out new products.

WMPs are flourishing in China: last week, 467 products were launched by 40 banks, according to CN Benefit, a consultancy focusing on China’s WM industry. The total assets of all WMPs at the end of last year stood at Rmb7.4 trillion, exceeding the total AUM of insurance products in China.

Most of the money in the WMP capital pool is invested in fixed-income and money-market funds, with some in higher-risk assets – such as property loans – to earn higher yields, says Fang Rui, an analyst at CN Benefit.

For example, a bank might lend money to a lender or project at an annual interest rate of 8% and a three-year maturity and then issue a one-year product with an expected return of 4%. This would involve the bank combining the project assets with bonds and earning the interest rate spread.

Clients are not told what the WMPs are actually invested in, notes Fang, so it is very difficult for them to estimate the actual size of the capital pool. “The prospectus may state [it is going into] bonds or money-market funds, but not the specific investment products.”

The biggest risk for the capital-pool WMPs regards liquidity matching. “The maturity [for payments from investment and payouts to investors] is different, so if no new capital comes in, issuers will face a liquidity problem.”

As a result of this ‘rolling over’ feature, the WMP capital pool was dubbed a ‘ponzi scheme’ by Xiao Gang, chairman of Bank of China. But Fang says that is not an entirely accurate description, because there is cashflow in the capital pool.

The CBRC says it will closely monitor WMPs this year by conducting on-site inspections, having started doing so at the end of last year. In February, the Shanghai Banking Regulatory Bureau announced a plan to set up a WMP registration platform in order to better regulate these products.