The outstanding balance of wealth management products (WMPs) in China rose about 60% to RMB23.5trn ($3.6trn) at the end of 2015 compared to the previous year, according to Fitch.
On average, 3,500 new products were issued every week during the year, and the majority are bought by retail investors who want the higher returns compared to bank deposit rates.
WMPs invested in through Chinese banks are growing faster than savings deposits and three-quarters are non-guaranteed, the firm said, adding that WMPs "could be a key source of credit and liquidity risk for certain financial institutions.
“The fast rise in WMPs is closely connected with the continuing growth in domestic credit, and they are accounting for an increasing proportion of funding at Chinese banks especially midtier institutions.”
If market volatility erupts again as it did in the second half of 2015, “banks with large sales of WMPs relative to deposits could face liquidity and funding pressures”, the firm warned.
Typically, wealth management products are repaid to the investor by issuing new WMPs, resulting in persistent payout pressure on banks.
“WMP issuance during 2015 topped RMB158trn - from RMB114trn in 2014 - highlighting the high churn rates of these products. When banks are unable to rollover, they have to either draw on their onbalance sheet liquidity or borrow money from the interbank market to meet payouts.”
Another risk is that some banks have used WMPs to support profit "while masking asset quality risks and leverage", according to Fitch.
"In this regard, [WMPs] can be viewed as a hidden second balance sheet, but with poor disclosure and few reserves or capital to cushion losses. Therefore the growth in WMPs could add to bank credit risks, especially with a history of banks bailing out investors in failed WMPs.”