China’s rapidly expanding shadow banking system has
attracted the attention of investors, particularly the role of
wealth management products (WMPs). This report aims to
identify potential warning signals and liquidity stress points
in the WMP market from a credit and equity perspective.
Our analysis is based on data from nearly 75,000 WMPs
offered by banks since 2009, the bulk of which are invested
in China’s trust industry and onshore bond market, both
increasingly important channels of credit and funding.
Unlike most market participants, we believe it is the yield,
rather than the total volume of WMPs, that is the forwardlooking
indicator to watch. Yields started to rise again at the
end of 2012 as loan growth picked up. We think:
 As credit growth, inflation and the property market
rebound in 2013, banks will have to offer higher yields
on WMPs to maintain funding stability.
 This would raise funding costs for banks and impose
higher effective financing rates on the real economy.
 Any change of risk appetite or perception about WMPs
by local investors could destabilise funding in the
banking system, especially for smaller banks which are
more reliant on these products.