BEIJING May 10 China should reorganize its
wealth management industry as it is unduly raising funding costs
and encouraging savers to behave like gamblers by chasing after
lucrative short-term returns, a deputy governor of China's
central bank said on Saturday.
In an unusually sharp criticism of the rapidly growing
wealth management business, Liu Shiyu said the sector has pushed
up funding costs for Chinese companies, causing credit to be
unpalatably expensive and distorting its economy.
"This type of practice where water is added at every layer
and prices are raised in an exploitative way at every link
directly increases costs in the real economy," Liu told a forum
on Saturday at Beijing's Tsinghua University.
"There is no contribution to labour productivity and it will
lead a nation, it will lead a country's financial system into a
short-term behaviour that is extreme in its gambling mentality."
He said wealth managers were lending money to companies at
rates of around 14 percent, but often offering rates of only
around 8 percent to individuals investing in their funds.
Fuelled by savers' and companies' thirst for higher returns,
China's wealth management sector has exploded in recent years.
Standard Chartered Bank estimated in January the industry
now manages around 11 trillion yuan ($1.8 trillion) and is
growing at an annual rate of 65 percent.
However, while wealth management products have rocketed in
popularity, the opaque nature of the sector has fed concerns
about the industry's health.
Liu warned in his speech that non-financial companies were
increasingly becoming involved in the wealth management
industry, lured by the attractive returns on offer.
"This outcome is a very terrible outcome," he said.
With China's economy stuttering and growth expected to grind
to a 24-year low of 7.3 percent this year, there are growing
concerns about the level of risk associated with the country's
Banks' non-performing loan ratios have edged up to a
two-year high, though they are still at a modest 1 percent. The
country also experienced its first-ever default of a
publicly-traded domestic bond in March.
Acknowledging the build-up in financial risks, Liu said
China's money supply as a percentage of its gross domestic
product was high, and would better if the ratio were lower.
However, he said that no economic theory shows that a bigger
ratio is concomitant with a higher level of risk.
China's M2 money supply - made up of cash and bank deposits
- was worth 188 percent of its GDP between 2009-2013, World
Bank data showed, over two times that of the United States' 88
Liu warned the methods companies use to raise cash were
causing concern. He said attempts by authorities to reduce
firms' reliance on banks for funds in favour of other financing
methods such as initial public offers have been unsuccessful.
Brisk credit expansion coupled with a slowing economy have
led some experts to worry that China may soon see another
painful spike in bad loans.
Liu said official estimates suggest Chinese banks wrote off
120 billion yuan worth of bad debt last year, more than the 80
billion yuan in write-offs disclosed by listed banks.
He said the 120 billion yuan worth of write-offs would have
erased all the profits that banks would have earned from issuing
4 trillion yuan worth of loans, assuming a net interest margin
of 3 percentage points.
Chinese banks disbursed a total of 8.9 trillion yuan worth
of new loans last year.
Referring to the flurry of wealth management products being
sold online by Chinese firms, Liu warned firms against using
products billed as being innovative, in a bid to dodge
"In some areas, the current financial innovation is really
about avoiding regulation," he said.
($1 = 6.2280 Chinese Yuan)
(Reporting by Koh Gui Qing; Editing by Sophie Hares)