Investment by listed companies in the wealth management products that are considered an integral part of China’s shadow banking sector have expanded to an unprecedented high.
According to a People’s Daily editorial piece entitled “Listed Companies Shouldn’t Manage Wealth” (上市公司该不该理财), China’s listed companies have evinced a rising enthusiasm for investment in wealth management products that has become particularly pronounced since the start of 2017.
Official data indicates that over 900 A-listed corporations had invested nearly 1 trillion yuan in the instruments as of the end of September, for an increase of more than 200% compared to last year.
The editorial claims that for some companies the returns from investment in wealth management products already exceeds their own operating profits.
The issue of investment in wealth management products by China’s listed companies has generated much contention, given the association of the instruments with shadow banking business, and their use by lenders to either dodge interest rate restrictions on standard deposits or channel funds towards restricted industries.
While some argue that the purchase of WMP’s by listed companies is “improper,” the editorial notes that the instruments are useful for short-term cash management purposes by corporations.
“The vast majority of companies with normal regulations cannot avoid having some idle cash during certain periods…using cash to purchase WMP’s with controllable risk and higher returns is of benefit to the interests of all shareholders.”
Other commentators also point out that some companies that have just closed financing deals also invest in wealth management products, which shows they are not in urgent need of cash but are simply “extracting cash” from the market.
The People’s Daily editorial points out, however, that investment in certain projects often entails staggered approvals that can stall and leave companies holding idle funds.
The investment of such money in WMP’s is in compliance with current regulations, with authorities widening the permitted scope of usage for funds over the past several years, allowing listed companies to use idle money to purchase investment products with high safety and strong liquidity.
“The original intention was to give listed companies breathing space, and increase the usage efficiency of funds raised.”
Another view common amongst detractors is that a large volume of listed companies are failing to use money for their own operations by investing in WMP’s, which is causes capital to “avoid the real economy and flow towards the empty.”
The People’s Daily also censures this viewpoint, however, claiming that “the vast majority of the funds raised by WMP’s still flows to the real economy.
“Although this does not rule out the possibility of the empty transfer of funds and dodging of regulations, this is only a small-scale phenomenon.
“For this reason, the purchase of WMP’s by listed companies will not trigger large-scale flight for capital from the real economy.”
While Chinese Communist Party’s flagship news publication would appear to be a defender of WMP’s purchases by the country’s joint-stock corporations, it does warn against the perils of excessive “inebriated” investment.
“When investors buy shares in a company it’s because of the prospects of its primary business, and not to let the listed company serve as a ‘WMP agent.’
“If an enterprise takes money raised form the market and becomes inebriated on WMP’s for long periods without working hard to expand its primary business or develop real projects, it cannot create real wealth for shareholders or society.”
The editorial further points out that WMP’s aren’t a source of “free wealth,” and that there is considerable risk associated with some of the instruments.
Bond defaults and failure of trust products to make payments have occurred in significant number over the past two years, while a considerable portion of the funds raised by WMP’s have flowed towards both bonds and trust products.
Although WMP investment does not pose as severe a systemic threat as many commentators claim, the editorial says that the ideal outcome for Chinese economy would be a reduction in financing costs achieved by cutting down on intermediary “links” such as WMP’s.
“While WMP funds may eventually flow into the real economy, they lengthen the capital transfer chain, which raises the cost of financing for the real economy.
“This reminds us that we should make direct financing the chief priority…when it comes to raising the efficiency of financial resource allocation, better expanding and positively exploiting the role [of direct finance] is the challenge faced by capital markets.”