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(The following was released by the rating agency)
Link to Fitch Ratings' Report: Chinese Banks - Issuance of Wealth Management Products Heats up as Year-End Approaches
BEIJING/HONG KONG, December 05 (Fitch) Fitch Ratings says Chinese banks' issuance of wealth management products presents growing risks for the sector as larger amounts of funding are sourced through this channel. WMPs are akin to time deposits, but the interest rates can be set freely by banks and many of the assets and liabilities reside off-balance sheet.
After a quiet Q212, the nominal amount of outstanding WMPs rose to CNY12trn in Q312, and could surpass CNY13trn by year-end (2011: CNY8.5trn). On the surface, this represents a modest 16% of commercial bank deposits, but for non-state commercial banks the share is much higher and rising. As much as half of all new deposit growth is now generated through this channel.
Unlike previous years, recent issuance has been driven mainly by non-state banks with more than 85% of the CNY3.5trn net increase in 9M12 taking place among joint-stock and city/rural commercial banks. These entities' thinner liquid assets and narrower deposit bases make them more susceptible to WMP repayment issues.
By end-Q312, Chinese banks were issuing the equivalent of 100 new WMPs per day. Turnover is high with approximately three-fourths of products maturing within six months. "Managing WMP issuance and payouts is becoming a growing logistical challenge," said Charlene Chu, head of Chinese banks' ratings at Fitch. "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."
Recent controversy over a soured investment product sold by Hua Xia Bank (Long-term IDR: 'BB+/Stable', Viability Rating: 'b') underscores the reputational risk incurred in selling some investment products to investors. The product in dispute was originated by a third-party investment company and was not a WMP issued under Hua Xia's name, yet the bank is still being held implicitly liable.
The report, "Chinese Banks: Issuance of Wealth Management Products Heats Up as Year-end Approaches", is available on www.fitchratings.com or by clicking on the link above.