1. Shadow Banking: Wealth Management Products in CHINA
Introduction to Banking Industry in China,
Group 3 : John Carlbaeck, David Tingaker, Jonathan Jarlén, Marcus Karnermo, Floriano Bollettini

2. Shadow banking
“... system of financial intermediaries that engage in credit-creation within the financial system but without proper regulatory supervision”
Purpose to Increase the volume of credit
Wealth Management Products (WMPs)

3. The study objective
... discuss the phenomena of WMPs in the context of the regulatory environment. Provide a better understanding of the underlying incentives to the rapid growth of the WMP market in China, as well as risks associated to it and the difficulties to regulate it.
Has the WMP market grown too big and important to fail?

4. Wealth Management Products
Characteristics: - Short maturity, average 4 months - High Fixed return, roughly 4-13%
- 80% of GDP - 9 trillion US dollar
WMP allocation: - 50,99% - Bond&Money Market - 22,38% - Cash&Bank Deposits - 15,73% - Non-Standard Credit Assets - 7,84% - Equities - 3,06% - Others

5. WMP
Off balance sheet activities offsets the Reserve Ratio Requirement, theoretically down to 0%. Since companies can reinvest their capital in WMPs.
Official requirement is roughly 17%
Reinvesting in new WMPS = Inducing risk

6. Wealth Management Products
Concerns: The Case of Credit Equals Gold #1
False perception of all products being guaranteed
Marketed and sold as low risk investments
Limited information regarding the underlying assets

7. The reason for the increase in WMPs
Transitory force
- Big financial crisis in 2008
- Aggressive lending
- Stimulus plan
- Difficult to stop
Structural force
- The government-dominated banks
- State-owned enterprises as main targets for lending
- SMEs need other ways of financing
The reason for the increase in WMPs

8. The incentives of actors in the WMP market
Depositors
- Ceiling on interest rate
- Greater yield
Banks
- Higher interest rates
- Meet loan-to-deposit ratio
- Competitive advantage

9. Main risks regarding WMPs
Systemic risk - The risk of a whole system and or industry collapsing - An increasing risk due to the sheer size
Default risk - Depending on the specific product
Interest risk - Maturity miss-match

12. Managing the risk
Yihang Sanhui - The People's bank of China, the China Banking Regulatory Commission, The China Securities Regulatory Commission and the China Insurance Regulatory Commission.
Cross-sectorial products, Subject to supervision from all regulatory bodies
Inform the public about the risks
Limits the risk of moral hazard

13. Regulations in recent times
China's banking regulators to start to impose more control
Perform internal risk inspections
Who will be allowed to invest in equity and “non-standard credit assets”
In total 46 new or revised regulations during 2017

14. Regulations going forward
Regulators in china have understood that the WMP market brings with it with large risks
The ambition seems to be to tighten the regulatory environment
Enough to sufficiently lower the risk?
Too much regulations may result in large exit of capital from the products
And if funds are not put back into the products this may result in the entire system falling on its side.

15. Regulation goals - Circular 107
States the overreaching policy goals -> maximize the benefits and minimize the risks
Add transparency and accountability to the industry.
WMPs must be separated
Clearly address in which sector the risk-bearing product operates in.

16. Analysis
Pros
Positive effect on the economic growth of China - Allow to finance corporations in need - Increase profits for both banks and private investors
Cons
Substantial share of Chinese credit
Too poorly regulated
Maturity mismatch
High risk of default
Dramatic consequences in case of default

17. Conclusion
Has the WMP market grown too big? - Indications of the WMP market becoming too big to fail
How can the government regulate the market without the sector going bust? - Loosen restrictions on deposit rates - Inform about the risk - Small gradual regulations - Smaller Bailouts

18. Q & A