Chinese Firms Load Up on Opaque Investment Products

FeaturesDow Jones Newswires

Chinese companies are buying more opaque, high-yielding investment products that are used by banks to raise funds and boost lending, a potentially troubling sign for China's debt-fueled economy.

Last year more than 1,170 publicly listed companies in China invested a record 1.24 trillion yuan ($192 billion) in financial instruments known as wealth-management products, according to data provider Wind Information Co. The volume was up 49% from 2016 and more than double the total amount two years earlier.

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Wealth-management products are short-term, deposit-like investments sold by Chinese banks, which often put the money in longer-term assets such as bonds, loans and trusts.

There is little transparency about the assets backing individual products, which often use leverage to juice their returns, which are much higher than rates on bank deposits. Most investors, which include individual savers and corporations, expect banks to guarantee the products and cover any losses among the underlying assets.

The business has swelled in recent years, worrying regulators because many banks have kept the products off their balance sheets rather than booking them as liabilities and disclosed little about their underlying assets and leverage.

The worry, say analysts, is that banks' heavy dependence on short-term funding from these products could become problematic if much of the money has been invested in risky assets, and defaults rise, saddling banks with losses and hurting their ability to raise money.

Over the past year, Beijing has attempted to rein in the rampant growth of high-yielding wealth-management products by requiring banks to count them as part of their credit and improve risk disclosure for investors.

Banks in China issued around 150,000 wealth-management products in 2017, up 45% from a year earlier, according to Wind's data. The total outstanding balance of such products was 28.4 trillion yuan ($4.4 trillion) as of mid-2017, down slightly from a record high in 2016, according to Moody's Investors Service.

Individuals have been piling into these products for years. Listed companies are a small but fast-growing group of buyers of wealth-management products. The vast majority of Chinese companies are closely held, so data of the total scale of corporate buying is hard to come by.

The average estimated yield of such products maturing in one to three months was recently 4.9% on an annualized basis, according to Wind, versus benchmark one-year Chinese bank deposit rates of 1.5%.

Among listed companies, heavy buyers of wealth-management products last year included property developers, manufacturers, food producers and technology companies, according to data from Wind.

Last summer, Fangda Carbon New Material Co., a Shanghai-listed graphite electrodes supplier, said it intended to invest 6 billion yuan of its "idle funds" in wealth-management products, an amount higher than its annual revenue.

The plan was rejected by the company's shareholders, forcing it to scale back. As of mid-December, Fangda Carbon had invested 4.6 billion yuan in the products. The company's revenue for the first three quarters of 2017 was $813.6 million, according to Wind. The company didn't respond to a request for comment.

Companies' increased purchases of wealth-management products suggest many firms don't have better uses for their cash, so they are "throwing money in the capital markets chasing higher yields," said Andrew Collier, managing director at Orient Capital Research, an independent research firm in Hong Kong.

The trend is troubling, he said, because it suggests that corporations aren't confident in generating strong returns from their businesses and instead hope to seek quicker profits from the financial market.

Many small and midsize Chinese banks that don't have stable deposit bases have been heavy issuers of these investment products, using them as sources of funding and a way to generate revenue. Fitch Ratings has described this as a type of shadow banking activity.

Among listed Chinese companies, one of the more active buyers of such products in 2017 was Hundsun Technologies Inc., a financial software firm backed by billionaire Jack Ma's Ant Financial Services Group. Shanghai-listed Hundsun in 2017 spent a total of 4.2 billion yuan on wealth-management products, according to Wind data.

The products were mostly issued by larger banks and had maturities ranging from three weeks to six months. A company representative said Hundsun has strong cash flows and most of the wealth-management products had very short durations, adding that their overall scale wasn't particularly large.

Some companies that went public recently used funds from their stock sales to invest in such products. In September, Harbin Medisan Pharmaceutical Co., an anti-amnesic drugmaker, raised 953 million yuan in an initial public offering in Shenzhen for medical research expansion, replenishing its capital and other purposes.

Afterward, the company said it would invest about two-thirds of the money it raised in what it called "highly safe, liquid and short-term" wealth-management products whose principal is guaranteed.

Filings in November showed the firm had purchased 649 million yuan in such products from three banks with terms of three or six months and annualized yields of over 4%. The filing didn't say what assets were backing the instruments. The company didn't reply to request for comment.

--Yifan Xie

(END) Dow Jones Newswires

January 21, 2018 06:14 ET (11:14 GMT)

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