Chinas Wealth Management Products Informal WMP Survey in China and - - PowerPoint PPT Presentation

China’s Wealth Management Products

Informal WMP Survey in China and Lessons from the U.S. Financial Crisis

Andrew Collier Orient Capital Research

Practitioner

• Peking U. Student.
• Former investment banker Bear Stearns, CLSA.
• Head of Bank of China International USA.
• Now independent research analyst for U.S.

investment funds.

Lesson One...

….Avoid Default.

WMP Survey

• Survey of WMPs in 15 Cities in China
• Data on 84 Products
• Cross-section of lenders
• “Snapshot” of the WMP Market

Cross-Section of Lenders

• Majority of lenders we surveyed are trusts.
• Cross-section of other lenders.

Loans: Large and Small

• Large Loans (RMB1M +) = 64%
• Small Loans (RMB1M - ) = 36%
• Institutional versus Private/Small Business

Use of Capital

• Paying off old debts – 37%
• Working Capital - 13%
• New Projects - 50%

Type of Investment

• Property - 28%
• Infrastructure – 25%
• Financial Products – 22%
• Small Business, etc. - 4%
• Unknown – 21%

Variability in Interest Rates

 Interest rates ranged from 4.5% to 85.8%.  Short term loans (24.8%) much higher than long-term (16.1%).  Short-term loans are “bridge- loans” or working capital, while long-term loans are for hard assets.  Long-term loans often LGFV related.

Shorter Durations

• Anecdotally heard durations

flattening.

• Historically, 20% of loans were
• for three years, 25% for two years,

and less than 20% under six months.

• 3M WMPs growing in popularity; 6 –

12M declinining (Fitch).

• Rising Concerns over Risk.

Smaller Banks Increasing Share

• Issuance from state banks declining

(Fitch).

• Local banks increasing participation.
• More “rogue” lenders in the market.

Parallels with U.S. Financial Crisis

• Principal/Agent Problem
• Mispricing of Capital
• Moral Hazard
• Excess Securitization
• Weak Asset Valuation
• Maturity Mismatch

Principal vs Agent

• Providers of capital must rely on financial “agents”
• Diversification of financial products in U.S.

– Mortgage Back Securities. – Securitization spread to other assets including autos, credit cards. – Rock’n Roll Bonds

• Chinese financial intermediaries “Blindly” sell

products that buyers don’t understand.

– Nanjing Bridge Project – Stock Boiler Rooms. – Sellers offer interest rates but no projects.

Mispricing of Capital/Risk

• Interest rates all over the map.
• Banks say “What interest rate do you want?”

Not “What risk can you manage?”

• Due diligence on projects/loans is scarce.

Excess Securitization

• Xian Developers – Prepay Tax.
• Potential for capital calls throughout

securitization chain.

– Declining land values.

• Correlation risk between asset classes – the

theory of falling dominos.

Asset Valuation Weak

• U.S. mortgage market – weak regulatory

system.

• PBOC has five working days to approve listing
• f trust contract; too little time.
• Rating agencies monitor trust products

“ongoing basis” rather than one-off rating.

Moral Hazard

• “Greenspan Put” = “PBOC Put”
• Excessive faith in financial regulators

– PBOC Support for SOE Banks – Repeat of Recapitalization of Banks

• Expectations for “Someone” to Recap Failed

Loans

• “The Government will always support the

property market.”

Securitized Products – Financial “Orphans”

• Securitization bridges gap between capital

markets and illiquid credit assets.

• Lack of clarity about issuer’s “fiduciary duty.”
• No rule on recourse to trustee if asset declines

in value – relevant to property market (similar to U.S. mortgage market).

Possible Solutions

• Create quasi-governmental financial

intermediary to provide liquidity like Fannie Mae/Freddie Mac.

• Need laws to clarify legal recourse for

borrowers.

• Need Compliance Chain: Each leg of issuance

is signed off with recourse instructions.