WMP- China's version of a Ponzi Scheme ??? 2

The WMP market has grew so huge, that should something goes wrong,  Chinese banks have their reputation on the line, and they face the risk of compensating investors because of pressure from the general public.  

Chinese banks, almost all state-controlled, have relied on such products to beef up their deposit base and finance long-term loans, some of which are held off their balance sheets and repackaged into assets to be sold to investors. Banks time the distribution and maturity date for the last days of the month so that the money can be returned to a saver’s deposit account and await purchase of new wealth-management products on the first day of the following month. That allows it to be considered a deposit on the bank’s balance sheet at month-end.  

Risk Perceptions 

Problem is it seems lenders and wealth-management investors have inconsistent perceptions of risk. While banks say the products’ returns are volatile and should reflect market realities, most customers regard them as de facto deposits and expect to make yields irrespective of all dangers.

The central bank on June 20 allowed the worst cash crunch in at least a decade and warned lenders to avoid raising short-term money to finance long-term loans as part of efforts to crack down on issuance of the products.  

While the two-week surge in borrowing costs was designed to reduce risky positions, the initial impact was to drive investors out of a plunging stock market and further into the shadow-banking system as lenders offered higher yields to attract savers’ money to ease their own liquidity shortage.  

Under certain conditions, the music must stop when investors lose confidence and stop their buying or withdraw from WMPs. The rollover of a large share of WMPs weighs heavily on formal banks’ reputations, because many investors firmly believe that banks won’t close down and they can always get their money back.