(Adds Fitch report details in paragraphs 14-17)
By Samuel Shen and Kazunori Takada
SHANGHAI Dec 5 (Reuters) - The husband of the employee sacked by China's Hua Xia Bank Ltd for allegedly selling wealth management products without authorisation said his wife had been made a scapegoat to deflect the bank's responsibility for the failed products, local media reported on Wednesday.
Hua Xia Bank said on Monday that an employee at the bank's Jiading branch in a Shanghai suburb sold products issued by the Zhongding Wealth Investment Center without permission, and a police investigation was under way.
Hua Xia's statement followed media reports that the products had stopped making payments to investors upon maturity.
In the last few years, sales of so-called wealth management products have soared in China, as banks compete for deposits in higher interest rate products than those offered on savings accounts.
Sales of the products grew to 12.14 trillion yuan ($1.95 trillion) in the first half of 2012, according to a July report by consultancy CN Benefit. Hua Xia Bank was one of the five most active issuers cited in the report.
On Wednesday, the news portal of Chinese firm Netease Inc quoted the employee's husband as saying the bank should bear responsibility. The man, identified only by his surname Xu, has hired lawyers to defend his wife, who has been arrested and is in police custody, the news portal reported.
"As a customer manager, Tingting (his wife) had no authority to transfer money over the counter or examine product risks," the husband told Netease.
"The products had been on sale for half a year, and now the bank is pushing the responsibility on her. Why is the bank sacking her now, when the products failed, rather than six months ago?"
Hua Xia reiterated its stance on Wednesday, saying the bank had no direct relations with the product.
"Hua Xia has never been a distributor of the scheme," the bank, partly owned by Deutsche Bank, said in a statement to Reuters.
"The scheme is a suspected crime and the public security bureau has stepped in to investigate," it said, adding the bank will fully cooperate with the investigation and will communicate with investors.
Attempts to reach Xu were unsuccessful.
It was not clear how many of the wealth management products had been sold, but a spokesman for Hua Xia's Shanghai operations said on Tuesday the bank may face some liability over the issue, without elaborating.
Fitch Ratings said in a report on Wednesday that the increasing issuance of wealth management products (WMP) by Chinese banks presents a growing risk to the sector, notably to smaller banks, which have been the main drivers recently.
"Managing WMP issuance and payouts is becoming a growing logistical challenge," Charlene Chu, head of Chinese banks' ratings at Fitch, said in a statement.
"Add to this poor disclosure plus the fact that many of the assets and liabilities spend much of their life off-balance sheet and there is clearly cause for concern."
The report said the Hua Xia case highlights the reputational risk incurred by banks in selling some investment products to investors, including those issued by a third-party.
So far, there has not been a high-profile case of default by a Chinese wealth management product, many of which are marketed by banks and highly sought by retail depositors attracted by their higher interest rates. Banks' liability for the performance of third-party instruments is untested.
Many of the products essentially channel money to the so-called shadow banking system, where they help fund real estate and other projects at very high interest rates. (Editing by Ken Wills and Jonathan Thatcher)