WMPs Reemerge As Credit Risk Fault Line

The story of China over the past couple years is a repeated series of land mines going off, but each one managing to be defused. Trust defaults, corporate bankruptcies, ghost cities, broke developers and credit guarantee failures. Instead of deleveraging and reform, however, the country drifted in the same direction, building up risk along the way.

Bloomberg: Welcome to the China Debt, Shadow Banking, Wealth Management Product Nexus

There's the uptick in bond spreads there, but still well below 2015 levels.

"The way that WMPs are sold in China has led many buyers to believe that these products are essentially term deposits. As a result, if financial institutions decide to pass on some of the default losses to these buyers, they may stop buying en masse, essentially generating a 'bank' run in the shadow-banking sector," the BofAML analysts, led by David Cui, write in their research.

No need to speculate, they will stop buying.

Indeed, there are some early signs of this dynamic at play already, with at least one bank reportedly taking money raised from WMPs to cover a defaulting bond, according to BofAML. The repeated use of such tactics may well represent a breaking of an implicit promise embedded in the products, they warn.

Another article from CNBC: China banks face credit risks from ties to wealth management products

Here's a post from here, two years ago: Credit Conditions Continue to Tighten; What's In Your WMP?

Back then it was trusts blowing up, but the WMP market was under pressure for awhile. Analysts were legitimately concerned about WMP risk in 2014, but there was never a crisis. Since then, the credits have become riskier and the total amount much larger.

Caixin reported in February: trust default risk is rising, with still a lot of bad debts hidden: 信托违约风险攀升 仍有大量坏账被瞒

Trust product default risk continued to climb. Reporters from the new fiscal authority was informed that, as of the end of November 2015, the existence of the risk of default of the Trust 524 projects, involving a total of 116.6 billion yuan of funds. The source reminded, "These cases of non-compliance may just tip of the iceberg, there are a lot of default risk, payment risk, liquidity risk cover down, cover up."

According to official Chinese Trust Industry Association data has been disclosed, since the end of the fourth quarter of 2014, the trust industry project risk and scale showed a quarterly rise. As of the end of December 2014, the Trust risk project 369, involving an amount of 78 billion. To the end of September 2015, the Trust increased the risk of project 506, total size of 108.3 billion yuan.

A 38% increase in 12 months, or more than 50% annualized.

A list of problem trusts from 2015: 2015信托违约事件全盘点


Here's an article discussing guarantee companies stepping in to bailout busted trusts with loans or asset purchases: 探索信托业保障基金公司风险资产收购业务

More at FT Alphaville: The apparently unstoppable Chinese search for yield

The chase for high yield (and high-volatility) products: With the memory of A-share market turmoil still fresh, we thought that risk aversion is the dominant theme in the near term. However, our respondents uniformly plan to increase their exposures to high-yield and high risk products in the near term. WMPs, capital market products and trust are set to gain most popularity in the next 12 months, at the expense of traditional bank deposits and protection assets such as pension and medical insurance. The structural shift of household asset away from bank deposits appears to be non-stoppable and will force traditional financial institutions like banks to adopt new funding strategy and business models.