While the latest official data indicates that the interbank wealth management product balance doubled in 2016, observers say that the era of surging growth is over as regulators pursue strenuous deleveraging.
China’s Banking Wealth Management Product Registration & Depository Centre released its “China Banking Sector Wealth Management Product Annual Report (2016)” on 19 May, revealing that the interbank WMP balance doubled in 2016 to 5.99 trillion yuan (USD$870 billion) in 2016.
According to the report interbank WMP’s comprised 20.61% of the total WMP balance at the end of 2016, for a rise of 7.84 percentage points compared to the start of the year.
Interbank WMP’s have seen skyrocketing growth over the past three years. At the end of 2014 the interbank WMP balance was only 490 billion yuan, comprising 3.25% of all outstanding WMP’s.
The interbank WMP balance broke through the 2 trillion yuan threshold in July 2015, rose past 3 trillion yuan by the end of 2015, and breached 4 trillion yuan by June 2016.
The instruments saw especially strong growth in 2016 as a result of low capital costs which permitted reductions in risk provisioning.
Era of rapid growth in interbank wealth management products ends
Market observers say that the era of surging growth in interbank wealth management products has reached a terminus, as China’s financial regulators strive to rein in leverage and lift scrutiny of the country’s shadow banking sector.
Wealth management products are considered to be the mainstay component of Chinese shadow banking, providing investors with rates of return higher than standard deposits, while enjoying an implicit guarantee from lenders.
During the period from 2010 to 2014, lenders were wont to use WMP’s to shift assets off balance sheets in order to dodge regulatory requirements with respect matters such as risk capital provisions.
Since 2015 they have also been commonly employed as wholesale debt instrument, with funds frequently flowing into China’s bond market.
Concerns over the rampant growth of interbank WMP’s has prompted the People’s Bank of China to include the instruments in its macro prudential assessments for Q1 2017.
Members of Chinese banking sector observe that interbank WMP growth began to ease in Q1 2017, with analysts estimating a decline of 3 percentage points in their share of all WMP’s outstanding.
They note that interbank funding costs are already too high to be enticing for borrowers, having risen from under 4% on average last year to 5% at present.
The overall scale of the Chinese WMP is unlikely to be heavily affected however, nor is growth expected to book an abrupt slowdown.