Chinese bank wealth management products boom - report

* WMP issuance up 43 percent year-on-year in H2

* Bond and money market products dominate

* Most have maturities less than three months

* Growth fastest among city commercial banks

By Gabriel Wildau

SHANGHAI, July 16 (Reuters) - Sales of wealth management products (WMPs) by Chinese banks soared in the first half of 2012, a survey released on Monday showed, fueling concerns that the rise of such products could destabilise China’s banking system.

Sales of WMPs totaled 12.14 trillion yuan ($1.90 trillion) in January through June, up 43 percent from the same period last year, a report by CN Benefit, a wealth management consultancy based in Chengdu, showed. Issuance totaled 6.65 trillion in the second quarter alone.

Analysts have begun to express concern that the extraordinary rise of WMPs over the last year is creating hidden risks in China’s banking system.

As customers abandon ordinary deposits in favor of higher yielding WMPs, banks’ cost of funds rise, and their funding base becomes less stable due to the tendency of customers to chase the highest yields by transferring funds frequently between competing products.

At the same time, market observers have criticized some WMPs for being far more risky than many retail investors realize.

“Right now most bank wealth management products don’t use a normal asset management-type operating model,” Xiao Fang, lead author of the report, told Reuters.

Bank of China, China Merchants Bank, Industrial and Commercial Bank of China, and Huaxia Bank took the top five spots in terms of issuance volume. But the report noted that the fastest growth occurred at small, city commercial banks.

The report also sheds new light on what type of assets underlie WMPs. Disclosures accompanying the sale of such products are often spotty, raising some fears among analysts that banks may be using the proceeds to fund risky loans to real estate developers or local government financing vehicles.

The report may put some of these fears to rest. It shows that 52 percent of all WMPs invest in relatively safe bond and money market instruments. Due to increased regulatory restrictions, less than one percent of products are based on loans and corporate, the report said.

However, 34 percent of products are classified as “mixed,” which means they could be partially based on loans or other illiquid investments.

Concern has centered around the potential maturity mismatch created by the short maturity of WMPs compared to the longer maturity of the loans that banks are using WMPs to finance.

CN Benefit’s report shows that 86 percent of WMPs have maturity less than one year, while 58 percent have tenors between one and three months and another 12 percent have tenors between three and six months.

Nearly five percent of products mature in less than one month, despite a rule issued by China’s banking regulator last year forbidding products with maturities of 30 days or less.

Another source of risk is a common misperception among investors that WMPs carry the same low risk as normal bank deposits.

Though banks are required to disclose risks to investors, analysts say a perception remains that banks and the government will not allow retail investors to take losses.

“They typically publish to investors a maximum expected yield. And usually they do what is necessary to guarantee that the products achieve this yield,” Xiao said.

The industry is expected to gradually move to a model based on publishing net asset values, so that the risks are more obvious to investors.

“The industry is still in an exploratory phase,” she said.

For its part, China’s ailing fund management industry has recently introduced a series of short-term bond products that aim to compete with WMPs. ($1 = 6.3789 Chinese yuan) (Additional reporting by Kelvin Soh in HONG KONG; Editing by Pete Sweeney and Simon Cameron-Moore)