(Updates with analyst’s comment in fourth paragraph.)
Aug. 15 (Bloomberg) -- Chinese households increased the amount of savings diverted into wealth-management products to a record 12.7 trillion yuan ($2.1 trillion) as the government tries to manage risks from an explosion in shadow banking.
The outstanding value rose 24 percent in the first half from the end of last year, the China Banking Wealth Management Registration System said on its website today. The average annualized return was 5.2 percent, compared with 3 percent for benchmark one-year deposits.
As signs emerge of weakening demand and rising default risks for higher-yield trust products, sales of the wealth products may keep surging. For banks, a more than 12-fold increase in the value of the products since 2009 is pushing up funding costs, threatening to weigh on profits.
“Compared with trust products, wealth-management products are less risky,” Cao Yang, an analyst at Shanghai Pudong Development Bank Co., said by phone.
China’s government is trying to contain risks outside the formal banking system while sustaining growth as the property market slumps and the economy heads for the slowest expansion since 1990.
Trust companies’ assets under management fell in June, the China Trustee Association said Aug. 11. Investors have protested outside some banks this year after delays in trust-product payments.
Wealth-management products typically require a minimum investment of 50,000 yuan, while trusts target wealthy clients with a minimum investment of 1 million yuan.
Today’s number compares with a 44 percent gain in the value of the wealth products in 2013, according to the China Banking Regulatory Commission. Almost 70 percent of the outstanding value of the wealth funds was invested in bonds, the money market and bank deposits as of the end of June, according to today’s report. About 23 percent were in so-called non-standard credit assets, such as loans.
Premier Li Keqiang is trying to give markets a bigger role in the world’s second-biggest economy. In a report in January, Standard Chartered Plc economist Stephen Green said that wealth- management products are “where China’s new middle class is meeting interest-rate deliberalization, and so far, households like what they see.”
While the products are not “a financial black hole,” they expose investors and banks to “ill-defined risks” and lack transparency, Green said.
China’s shadow banking, including wealth products, trusts, money-market funds and some interbank lending is estimated at 27 trillion yuan, or about 19 percent of the nation’s total banking assets, researchers of the Chinese Academy of Social Sciences said in May.
Almost 60 percent of outstanding wealth-management products by value were bought by retail customers, with institutional investors, private-banking clients and interbank funds accounting for the rest, today’s report said.
Bank of China Ltd. is set to be the first of China’s big banks to report second-quarter earnings, on Aug. 19. Lenders are facing growing competition from Internet funds, trusts and brokerages for the nation’s 49.6 trillion yuan of household savings.
--With assistance from Helen Sun in Shanghai.