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Massive Sell-off of Wealth Management products poses risks to Chinese Banks



China's short-term government bonds are experiencing their steepest decline since mid-2020. The drop, fueled by a shift to riskier assets include stocks, causes retail investors to rush to withdraw from fixed-income products or wealth management products (WMPs) issued by banks.  This further exacerbated the downward spiral and caused more people to withdraw from WMP.  The sell-off also spread to the top-rated corporate bonds which makes their yields hit a record this week.

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China's short-term government bonds are experiencing their steepest decline since mid-2020. The drop, fueled by a shift to riskier assets include stocks, causes retail investors to rush to withdraw from fixed-income products or wealth management products (WMPs) issued by banks.  This further exacerbated the downward spiral and caused more people to withdraw from WMP.  The sell-off also spread to the top-rated corporate bonds which makes their yields hit a record this week.

Massive Sell-off of Wealth Management products poses risks to Chinese Banks

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In recent days, investors have strongly sold Chinese government bonds to move money into the strongly bouncing stock market which causes yields to rise rapidly.  Yields on China's 1-year government bonds rose about 40 basis points over the past five days to 2.25% - the highest since January. 10-year Chinese government bond yields increased to 2.85% on November 16 - the highest since December last year.

Chinese government bonds have lost attraction in recent weeks as Chinese stocks recovered.

Investors also sold off highly-rated corporate bonds and fixed-income WMP products issued by banks which makes the safe asset market even more chaotic.

China's $10 trillion stock market has soared in recent days after Beijing eased some Covid-19 control measures and launched a sweeping rescue package for the real estate sector as well as taking steps to reduce tensions with the US and other Western countries.  With money flowing heavily into stocks and other economically sensitive investments, safe-haven bets on Chinese government bonds have taken a hit.

According to research from Citic Securities, outstanding loans of WMP products at Chinese banks amounted to 9.78 trillion yuan (US$1.371 billion) as of mid-October. Bond investments accounted for 68% of WMP's assets at the end of June, according to official data.

Over the past week, as of Nov. 16, more than 10,000 of the 30,000 WMP products have recorded losses on paper, according to Shanghai-based consulting firm Financial Regulation & Law.

China's largest banks are said to have access to ample capital, but extreme price swings and massive withdrawals by selling WMP products have increased the risk of short-term capital imbalance.  WMP products with daily fluctuating prices and liquidity are a relatively new thing in China.

Sources said that at least five Chinese banks have reported about their liquidity conditions and potential risks to the PBoC and the China Banking and Insurance Regulatory Commission (CBIRC) in recent days, including a plan to fulfil investors' withdrawals.

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The sharp decline in the bond market led to a drop in the prices of some WMP products.

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Massive Sell-off of Wealth Management products poses risks to Chinese Banks

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