WMP( wealth-management products) - China's version of a Ponzi Scheme??? 1

Due to China’s credit crunch in June, millions of Chinese divert a large share of their savings into wealth-management products, known as WMPs. Many blame it on government's efforts to curb property speculation and bolster the stock market, which has lost almost 40 % of its value since 2010. Though offered by banks, WMPs are considered part of China’s shadow-banking system, estimated at $6 trillion, or 69 %of gross domestic product.  

So what's the attraction of these WMP?

Higher Rates  

Simply because they provide higher rates of return. WMPs is rather like time deposits to investors, except that most of them don’t have their principal guaranteed by banks. About half invest in low-risk deposits, bonds and money markets. The rest venture into riskier areas including stocks, derivatives and loans to local governments and property developers.  As investors increases, financial firms need even more induction of cash to pay off maturing products, resulting in mounting risks that prompted many experts to call them a “Ponzi scheme”. 

Property Restrictions  

China’s home-purchase restrictions over the past two years have also led families to invest in WMPs and trusts. Unlike investors in trusts, buyers of wealth-management products are mostly normal bank savers who are less savvy about investments and can’t afford to incur large losses. An investor with as little as 50,000 yuan can buy WMPs that have maturities ranging from a few days to as long as a year. For trusts, investors need at least 20 times more cash and an investment horizon exceeding a year.