China wealth management products threaten bonds

Bloomberg

China’s most popular savings products have become a battleground for the nation’s smaller banks, which are competing for funds in a market that’s drawing increasing scrutiny from national policy makers. Whatever the result, one of the main
casualties is set to be the domestic bond market.
The accounts known as wealth management products, offering lesser-regulated returns that beat the rates on regular bank deposits, swelled to 29.1 trillion yuan ($4.3 trillion) by the end of 2016. Banks selling the WMPs poured much of the funds into the bond market. With competition heating up, WMP rates have been rising — a trend that means the managers must demand higher yields on investments to break even.
Average rates on one- to three-month WMPs jumped to 4.43 percent at the end of June, the highest in at least a year, according to data from PY Standard, a Chengdu-based consulting firm specializing in the field. That’s bad news for a bond market that’s had a bit of a rebound in recent weeks on signs officials were easing off on their deleveraging campaign. “This is a leading indicator for the bond market,” said David Qu, a market economist at Australia & New Zealand Banking Group Ltd. in Shanghai. “As liability funding costs rise, banks will seek higher asset yields.”
The climb in WMP rates preceded a move by the China Banking Regulatory Commission this month telling lenders to lower the returns offered on WMPs that are kept on banks’ balance sheets. While most WMPs are off balance sheet — mainly at small lenders — the step was a signal that officials were growing uncomfortable with the rising yields.
Yet moves to quell rates could still hurt the onshore bond market, by limiting the growth in WMPs themselves. About three-quarters of the vehicles were invested in bonds, money-market instruments and deposits at the end of last year.
“If they don’t let banks raise yields, the size of WMPs will be smaller,” said Qin Han, a bond analyst at Guotai Junan Securities Co. “The key is WMP returns are being pushed down by human intervention, rather than the market. This is bearish rather than bullish news” for the bond market,
he said. For now, government and corporate bond yields remain lower than their highs reached in May
and early June, and money-market rates are also down from earlier in the year, when the CBRC and central bank were unveiling a series of measures to rein in leverage in China’s indebted economy.
Besides liquidity injections from the People’s Bank of China, the bond market has also been supported by the recent slew of WMP issuance. Chinese banks sold 10,922 WMPs in June, the most in comparable PY Standard data going back to January 2016. WMPs, along with mutual funds, poured an unprecedented 399 billion yuan into the bond market, ChinaBond data show, and banks’ issuance of short-term debt rose to the second-highest on record.