China’s $3.7 Trillion Wealth Industry Is Plagued by Sub-3% Returns

(Bloomberg Opinion) -- Which companies may blow up and which stock indexes will nosedive? Most investors are not distressed-debt specialists and are not keen to find out. 

As China undergoes a structural economic transition that may last decades, low-risk investments that yield 3% are becoming rare. It’s disorienting for a nation of savers who could easily get that rate from plain-vanilla bank deposits just a decade earlier. 

Banks have been lowering performance benchmarks for new wealth management products. In March, big state-owned institutions were on average guiding 2.9% for their offerings, down from 3.3% at the onset of 2023. One could earn a bit more from riskier and less-capitalized city commercial lenders, but the expected returns there were not much better at an average of 3.28%. As of 2023, banks managed 26.8 trillion yuan ($3.7 trillion) of wealth management products. 

A bear rally in bonds, as well as a stock market rout, is behind what the Chinese call an “asset famine.” These days, the 10-year sovereign note is at only 2.25%, the lowest on record. Of the 15 trillion yuan corporate bond market, about 87% offers sub-3% yield. 

As a result, wealth managers are struggling to meet their benchmarks, especially for older products. To appease disappointed investors and get them to stay, some have slashed management fees all the way to zero. Meanwhile, banks are cutting deposit rates and a few have stopped offering longer-term certificates of deposits, so that wealth management products look relatively alluring. 

This comes at the worst time for commercial lenders. The People’s Bank of China’s interest rate cuts have already compressed net interest margins to 1.7%, below the 1.8% threshold that the industry deems necessary to maintain profitability. Now, commissions and fee income are under pressure too.

The PBOC may be to blame for this asset famine and the sharp squeeze in fixed-income returns. For almost two years, money supply growth has well exceeded demand. 

This perhaps explains why President Xi Jinping recently called for the central bank to include government bond buying and selling in its open market operations. It’s probably not the kind of quantitative easing desperate traders had been calling for. Rather, it will be an attempt by Beijing to control bond yields, so that they don’t go too low and pressure banks’ financial health as well as the yuan.

Of course, China’s middle class is not happy with this low-return environment, either. Only 15.6% plan to invest more, a sharp drop from 43% at the height of the 2015 stock bubble, according to the central bank’s latest urban depositor survey. There are simply no winners in this sub-3% world. 

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder.

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