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Real Time Insight

If you have extra money to invest in China there are only a limited number of places to put it.

1. The Chinese stock market
2. Housing- which the Chinese government has recently placed restrictions on to control speculation
3. Deposit it in the bank earning around 3%
4. Buy a WMP, otherwise known as a Wealth Management Product, that is "guaranteed" to return anywhere from 5% to 13% a year

As you can imagine, investing in WMPs with those "guaranteed" returns has become a no-brainer. Investment in WMPs by "sophisticated" investors has soared.

According to the China Banking Regulatory Commission, as of the end of Sep 2013, $1.6 trillion was invested in Wealth Management Products, or WMPs. China analysts expect that number to be as high as $2 trillion as of the end of 2013.

WMPs aren't backed by a financial institution even though the big four banks actually market the products. They are backed mainly by infrastructure and real estate investments which, presumably, will create a big enough return to pay investors their principal and their "guaranteed return" when the WMP matures.

But that's where things have gotten tricky.

Three times in 2013, a WMP has matured but the money wasn't there to pay investors. The largest of those troubled WMPs involved just over 90 investors and was worth about $180 million.

Instead of allowing a default, the large banks, and in one case, a mysterious donor, came forward to pay out the investors. The defaults never happened.

January 31 = Default?

But on Jan 31, a $496.2 million WMP called "2010 China Credit-Credit Equals Gold #1 Collective Trust Product" is due to mature.

The money was originally loaned to Shanxi Zhenfu Energy Group, a coal miner, which the Chinese press has reported is basically bankrupt.

This WMP was sold through the Industrial and Commercial Bank of China ("ICBC"), the world's largest bank by assets.

Last week, with default looming, ICBC took the extraordinary step of speaking with Reuters about a possible bailout.

"Regarding this unsubstantiated rumour, a situation completely does not exist in which ICBC will assume the main responsibility (for the trust product)," an ICBC spokesman told Reuters by phone on Tuesday.

Some Chinese banking analysts believe that the Chinese central bank, the PBOC, WILL allow this one WMP to default in order to send a message that there is no guarantee on these products and speculation won't be rewarded.

But the defaults won't stop there.

In 2014, around $700 billion in WMPs are expected to mature. According to Chinese banking analysts, about a third of those will likely default.

What Will the PBOC Do Next Week?

A. It allows this WMP to default to "send a message" and hopes there isn't any contagion.

B. It lets it default and gets ready to bail out about $225 billion in bad investments throughout the rest of the year.

C. The PBOC orders ICBC to bail it out, so the bank will take the hit.

D. Some other entity suddenly comes forward to bail it out to avoid the default.


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