Chinese Banking System

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  • Published : February 10, 2013
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In China savers are turning from traditional deposits to a higher return wealth management products; this trend is exposing risks to the Chinese banking system. Wealth management products are a mix of short term investments such as bonds, money market funds and other securities and the potential risk is that banks invest the proceeds from sales of these products in securities with longer maturities than short term investments; when products mature, banks persuade customers to either roll over the investments or pay out using funds raised from the sale of new products, but that strategy could fail if demand for new products drops and banks do not have enough money to pay holders of maturing products leading to serious repayment problems. Instead of managing each product separately, Chinese banks mingle all the funds coming from the products sold into one pot which is then invested, the pot has cash flow from the return of investments and also from the sale of new products which the banks can then use to cover redemptions. Banks need to invest in long term assets to get the returns they promise to customers and can not afford to be cashing out of investments each time a product matures. As stated in the article one of the main reasons that investors are opting for higher return wealth management products is that banks continue to market them as a low risk alternative and in some cases sales people advertise them as a risk free products. There are several rules that were issued requiring banks to disclose important details about risks involved when investing in high return products, it is important to have customers aware of the potential to lose money. Investors can combine wealth management resources with risk management when doing their financial and investment planning to maintain and enhance their profits.
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