WMPs on the Chopping Block
In an effort to prevent the types of stock market crashes that have rocked China’s economy over the past 18 months, regulators are trying to squash the growth of leverage-based products.
The growth of credit has been a double-edged sword for the Middle Kingdom; one side fighting a slowdown in the Chinese economy, and the other side causing self-inflicted wounds. (Source: “China Central Bank Seeks More Control Over Wealth-Management Products,” The Wall Street Journal, October 26, 2016.)
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Many analysts believe the tipping point came when China allowed margin trading on the Shanghai Stock Exchange. Although they imposed a 2:1 leverage limit, commercial banks devised a range of questionable products that allowed customers to ramp up their exposure.
These so-called “wealth management products” (WMPs), have come under close scrutiny in recent weeks. Reports say the People’s Bank of China (PBOC) now wants high-yielding WMPs counted as part of overall credit, a move that should help clamp down on the use of leverage.
The notice was sent out to commercial banks on October 20.
Wealth management products more than tripled as a proportion of bank assets between 2011 and 2015, with a noticeable slowdown thereafter. However, the current amount of outstanding WMP assets is somewhere above ¥25.0 trillion, thus putting it on the PBOC’s radar.
At the same time, many municipal governments poured cold water on the housing market by tightening home lending requirements. They are also squeezing developers who use bonds as a funding source, pressuring them to offer equity stakes as part of a debt forgiveness scheme.
Beijing has become increasingly preoccupied with debt management, as the country’s debt soars to 225% of GDP.
This compares to eight years ago, when China’s debt-to-GDP ratio stood at 125%. The International Monetary Fund (IMF) is worried about this increase, and is concerned about whether China can manage the situation without adversely affecting its own economic growth.
The country is trying to peacefully transition the economy’s focus from manufacturing to consumption. Hundreds of millions of Chinese people have been lifted out of poverty in the last two decades, with many of them entering a new, burgeoning middle class.
Their purchasing power has yet to be tapped by the Chinese economy, but it is a necessary step if China is to escape the so-called “middle income trap” of developing nations.
