China’s zero-Covid retreat sparks sell-off of wealth management products

Beijing’s withdrawal from its zero-Covid policy is wreaking havoc on the country’s Rmb 29 trillion ($4.1 trillion) wealth management products market, with some fund managers having to freeze withdrawals or sell their holdings as they face a rush are struggling from investor redemptions .

According to public records, half of the country’s 31,000 outstanding fixed-income WMPs have reported a fall in value since the government announced March 11.

Wind, a provider of financial data, reported that 1,837 fixed-rate WMPs, a key source of funding for China’s bond market, traded below face value on December 12, compared with 256 in early November.

WMPs are investment products typically issued to retail investors by banks and real estate developers. Investors looking for stable yields flocked to relatively conservative bond-focused WMPs as China’s markets plummeted due to Beijing’s pandemic lockdowns and a long-running real estate crisis. The CSI 300 index of stocks listed in Shanghai and Shenzhen fell more than 20 percent between July and October.

The Nov. 11 announcement reversed these trends as stock market investors hoped the new measures would boost the economy, corporate earnings and stock prices. Jeffrey Zhang, a Shanghai-based wealth manager, said the “economic outlook has brightened significantly.” The government’s subsequent decision to scrap zero Covid controls, announced on December 7, further fueled optimism among stock traders.

The Chinese one-year government bond yield, which rises when underlying bond prices fall, had risen to 2.3 percent on December 12, from 1.7 percent in early November. Rising yields forced Chinese companies to cancel Rmb 131 billion in bond issuance in November, the highest level since September 2021.

This triggered an even bigger wave of redemptions as WMP investors lost confidence in the products and feared additional losses. As more money was pulled out of the WMP market as a result of this dumping, bond fund managers have sold their holdings to meet redemptions in a self-reinforcing cycle.

“The panic selling could continue for a while as a negative feedback loop has formed,” said Huang Da, a bond fund manager based in Hangzhou, capital of eastern Zhejiang Province.

Some banks, particularly smaller local lenders, have also sold their WMP holdings to raise funds for government-mandated relief measures to boost the property sector, according to a senior Chinese bank executive.

“Regional lenders have had a smaller increase in deposits over the past three years,” the executive said. “To support the real estate sector, they need liquidity. An easy option for them is to sell [WMPs] replenish capital.”

A popular WMP issued by China Merchants Bank stopped accepting withdrawal requests on Nov. 16 as it struggled to keep up with the influx. More than Rmb 200 million was withdrawn from the WMP that day, which is about 10 percent of their assets.

“There was too much money in the bond market,” said Larry Hu, Macquarie’s chief China economist in Hong Kong.

The Chinese central bank on November 15 increased pressure on the bond market by cutting its one-year medium-term lending facility to Rmb 850 billion from Rmb 1 trillion in October.

“The People’s Bank of China thought there was too much market liquidity,” Hu said. “The tightening was aimed at preventing funds from circulating in the financial system without entering the real economy.”

While the PBoC reversed course on Nov. 17, injecting fresh liquidity into the market, traders said the central bank is unlikely to ease much further, fearing the renminbi could weaken further against the dollar and capital flight pressures would intensify.

“The WMP redemption action will get worse before it gets better,” Huang said.

Additional reporting by Cheng Leng in Hong Kong and Tom Mitchell in Singapore

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