China’s central bank published rules on Thursday governing investment by wealth management products (WMPs) in the country’s bond market, in a move aimed at containing risks posed by banks’ off-balance-sheet business.
WMPs are short-term investment products that banks market to customers as higher-yielding alternatives to traditional deposits.
In principle, banks simply manage WMP assets on behalf of clients, with the client, not the bank, exposed to losses if the assets decline in value. But analysts warn that China’s banks’ are increasingly exposed to the loans, bonds and other off-balance-sheet assets underlying WMPs.
That is due in part to the maturity mismatch between short-dated WMPs and longer-dated bonds and the loans that underlie them. This mismatch often forces banks to use their own funds to make cash payouts on maturing WMPs when the underlying assets have not yet matured.