20 May 2019
Speculative fund flows add to the risks facing the Chinese stock markets, which have been on a roll recently. Photo: Bloomberg
Speculative fund flows add to the risks facing the Chinese stock markets, which have been on a roll recently. Photo: Bloomberg

China markets hold promise but volatility looms

China’s stocks markets have more upside potential even after their recent big rally, as authorities have sent a clear signal that they aim to steer funds into equities from wealth management products and the property sector, according to T Y Ko, a columnist for the Hong Kong Economic Journal.

The China Banking Regulatory Commission (CBRC) recently issued a draft regulation that will allow commercial banks to open capital and securities accounts independently to facilitate direct investment in wealth management products.

The move is expected to inject trillions of yuan into the capital markets during the next few years, according to a research report by Haitong Securities, a major securities firm in China.

The draft regulation is aimed at tackling the problems of implicit deposit guarantees and rigid earnings potential, in order to facilitate the healthy development of wealth management products.

Nevertheless, the China Banking Regulatory Commission (CBRC) also said that high-net-worth individuals, private banking and institutional clients who have “relevant investment experience and high risk profile” will be exempted from the regulation, the columnist noted.

A number of third-party fund companies have launched various A-share wealth management products amid bullish market sentiment. These products are usually distributed by commercial banks.

And some banks have lured retail customers with 10 percent or even 20 percent “expected return”, and then more than doubled the investment bet in stock market, mostly listed bank shares, using margin trading.

The ideal case is that the individual investor gets the so-called “expected return”, funds get their management fee and charges based on performance and banks also make distribution earnings. Everyone is happy.

The above practice is one of the main forces that has been driving up mainland banks’ shares recently. However, that could result in “systematic risk” as well. All these funds sourced from wealth management products have entered the stock market at the same time, and focused on the same category of stocks.

Once the stocks reverse the uptrend, the funds would compete with one another to dump shares, which could lead to even more dramatic price falls, Ko warned.

Moreover, many retail investors have limited knowledge about the wealth management products. If everything goes well and all make money, everyone will be happy. However, if the market moves downward, banks could face a huge challenge and retail investors may find that the “expected return” would be up in the air.

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Freelance journalist

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