China’s $3.7 Trillion Wealth Industry Plagued by Sub-3% Returns. Achi-News

As China undergoes a structural economic transformation that could last decades, low-risk investments yielding 3% are becoming scarce. It’s confusing for a nation of savers who could easily get that rate from plain vanilla bank deposits a decade earlier.

Banks have been lowering performance benchmarks for new wealth management products. In March, large state-owned institutions were on average leading 2.9% for their offers, down from 3.3% at the start of 2023. One could earn slightly more from riskier and less capitalized municipal commercial lenders , but the expected returns were. not much better at an average of 3.28%. As of 2023, banks managed 26.8 trillion yuan ($3.7 trillion) of wealth management products.

A bear rally in bonds, as well as a stock market rout, is behind what the Chinese call “asset hunger.” These days, the 10-year sovereign note is just 2.25%, the lowest on record. Of the 15 trillion yuan corporate bond market, about 87% offer sub-3% yields.

As a result, wealth managers struggle to meet their benchmarks, particularly for older products. To placate disappointed investors and get them to stay, some have cut management fees all the way to nothing. Meanwhile, banks are cutting deposit rates and some have stopped offering longer-term certificates of deposit, so that wealth management products look relatively attractive.

This comes at the worst time for commercial lenders. The People’s Bank of China’s interest rate cuts have already compressed net interest margins to 1.7%, below the 1.8% threshold the industry considers necessary to maintain profitability. Now, commissions and fee income are also under pressure.

Perhaps the PBOC is to blame for this asset starvation and the sudden squeeze in fixed income returns. For nearly two years, money supply growth has far outpaced demand.

This may explain why President Xi Jinping recently called on the central bank to include the buying and selling of government bonds in its open market operations. This is probably not the kind of quantitative easing that desperate traders had been calling for. Rather, it will be an attempt by Beijing to control bond yields, so that they do not go too low and the financial health of pressure banks as well as the yuan.

Of course, China’s middle class is not happy with this low return environment either. Only 15.6% plan to invest more, a sharp drop from 43% at the height of the 2015 stock bubble, according to the central bank’s latest urban depositor survey. There are simply no winners in this sub-3% world.

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This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, he was a markets reporter for Barron’s. She is a CFA charterholder.

More stories like this are available at bloomberg.com/opinion

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Published: 22 Apr 2024, 02:37 AM IST