China’s banks are rolling vast sums through wealth-management
products. The amounts involved, the maturity mismatch between assets and
liabilities, and the fragile state of final borrowers all increase the
chances of a misstep — and the severity of an impact should one occur.
That underlines the importance for the government to maintain buoyant
nominal growth, ample liquidity and low interest rates.
In 2015, China’s financial firms raised 158.4 trillion yuan ($24
trillion) — equal to about 230% of GDP — by issuing wealth-management
products (WMPs). The amount of WMPs outstanding at the end of the year
was 23.5 trillion yuan. The gap between those numbers reflects the fact
that most products have a maturity of a few months so funds are rolled
over, perhaps several times, over the course of the year.
Where’s all the money going? Sectors with higher risks loom large in
the breakdown. Construction, infrastructure, real estate,
transportation, power and coal mining account for more than 50% of final
borrowers in 2015. Investment projects in those sectors have a time
line stretching over years, not months. Stressed balance sheets for
borrowers increase the chances of a problem somewhere along the way,
especially as state backing no longer provides a 100% no-default
guarantee.
With 23.5 trillion yuan in credit dependent on the capacity of banks
to roll over 158.4 trillion yuan in funds, confidence is key. The risk
is that a high-profile blowup in an individual WMP could trigger a
pullback by household savers and corporate treasurers pumping funds into
the sector. If that happens, the consequences could be far reaching: a
sell-off in the bond market (the main destination for WMPs) and a cash
crunch in the sectors that depend on WMPs for funds.
How likely is that to happen? It’s tough to say. On the one hand,
managing maturity mismatches is what banks do. On the other, as the
amounts involved grow, so does the risk of a mishap. Expect China’s
government to work overtime to prevent risks from crystallizing:
- Maintaining high nominal growth to prop up corporate profitability.
- Ensuring low interest rates and ample liquidity to reduce financing costs and minimize disruptions.
- Actively managing any blow ups, making investors whole to minimize the risk of contagion.
- http://www.bloomberg.com/professional/blog/insight-chinas-banks-24-trillion-rollover-risk/
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