Wealth management products in China have been immensely popular in recent years. While the domestic stock market is notorious for being extremely volatile, even moribund investors have sought alternatives. Negative real interest rates have also been curtailing investment within the country. Despite the large demand in alternative investment products, Chinese markets dropped significantly Thursday following an announcement by banking regulators that new policy would tighten restrictions on wealth management products. This is an attempt to reduce “shadow banking” which the country sees as a threat to long-term stability. Mid-size lenders have been most affected by the recent with decreases of 8.9%, 8.7%, and 5% of China CITIC Bank, China Minsheng Bank, and China Merchants Bank share values, respectively. Recent growth decreases have put pressure on financial institutions to perform, but the country seeks to limit shadow banking exposure through narrowing the range of products wealth managers are allowed to invest in.
3 Responses to Alternative Investors Under Fire from Bank Regulators
I wonder how the nature of Chinese exchanges plays a role in this. In the B&R book there is a chapter mentioning the gains achieved in Chinese exchanges dominated by those with insider information, and that the market is not really indicative or close to “efficient” as in the US market (supposedly). How does affect our viewpoint when presented with statistics and information, especially now in 2013?
One response might be to encourage “shadow banks” to move into the sunlight and become formal financial institutions, rather than trying to drive them into deeper shadows. Of course existing banks would see this as a threat to their deposit base, but not to their loan portfolio as cheap rates would keep firms lined up at their doors. Finding ways to get shadow banks to grow may in fact be well understood, the “grameen” system and (in Japan) the growth of local savings associations both provide ways to regularize informal lending and eventually formalize these operations as proper (regulated!) financial institutions.
I also wonder how this will effect Chinese exchanges. Will this have a great negative impact on the borrowing capacity for businesses? If so, economic growth could become stagnant and bank regulators may have to make other changes to accommodate the faults in their banking system. Also, it seems like it is only a matter of time before financial institutions with need to be “formalized” in order to prevent future threats to mid-size as well as larger banks.