Beijing’s retreat from its zero-covid policy is causing chaos in the country’s Rmb29tn ($4.1tn) market for wealth management products, with some fund managers having to freeze funds or sell their holdings as they struggle to cope with rapid redemptions from investors. .
Half of the country’s 31,000 fixed-income WMPs reported a drop in prices after the government first announced on Nov. 11 that it would ease its strict Covid-19 approach, according to public reports.
1,837 fixed-income WMPs, the main source of funding for China’s bond market, traded below par as of Dec. 12, compared with 256 in early November, according to financial data provider Wind.
WMPs are investment products typically offered by banks and property developers to retail investors. As China’s markets tumbled due to Beijing’s pandemic lockdowns and a prolonged asset crisis, investors looking for a stable return piled into relatively conservative bond-focused WMPs. The CSI 300 of Shanghai- and Shenzhen-listed stocks fell more than 20 percent between July and October.
The November 11 announcement reversed these trends, as stock market investors hoped the new measures would boost the economy, corporate profits, and stock prices. As a result, “the outlook for the economy has become significantly brighter,” said Jeffrey Zhang, a Shanghai-based asset management executive. The government’s subsequent move to avoid zero-covid controls, announced on December 7, further boosted traders’ optimism.
The yield on one-year Chinese Treasuries, which is issued as bond prices fall, rose to 2.3 percent on Dec. 12, compared with 1.7 percent in early November. Rising production levels forced Chinese companies to cancel Rmb131bn worth of bond issuance in November, the highest level since September 2021.
This triggered an even bigger wave of redemptions as WMP investors lost confidence in the products and worried about further losses. As more money exits the WMP market in this mess, bond fund managers are selling their holdings to meet redemptions in a self-reinforcing cycle.
Huang Da, a bond fund manager based in Hangzhou, the capital of eastern Zhejiang province, said: “The panic sell-off may continue for some time because of negative feedback.”
Some banks, particularly smaller domestic lenders, are selling their WMP holdings to raise funds for government-mandated relief measures to boost the property sector, a senior Bank of China executive said.
“Regional lenders have had a small increase in deposits in the last three years,” said the executive. “To support the property sector, they need liquidity. The easy option for them is to sell [WMPs] to replenish capital”.
A popular WMP issued by China Merchants Bank stopped taking exit orders on November 16 as it struggled to keep up with the flow. More than Rmb200mn was withdrawn from WMP that day, an amount equivalent to 10% of its assets.
“There was too much money in the bond market,” said Larry Hu, chief China economist at Macquarie Hong Kong.
China’s central bank increased pressure on the bond market on November 15 by cutting its one-year medium-term lending facility to Rmb850bn from Rmb1tn in October.
“The People’s Bank of China thought there was too much market flow,” Hu said. The consolidation aims to prevent it from flowing through the financial system without penetrating the real economy.
Although the PBoC changed tack on Nov. 17 and pumped fresh liquidity into the market, traders said the central bank was unlikely to relax significantly, fearing the renminbi would weaken further against the dollar and capital flight would exacerbate pressures.
“The WMP ransomware drive will get worse before it gets better,” Huang said.
Additional reporting by Cheng Leung in Hong Kong and Tom Mitchell in Singapore