Wealth management products in China: understanding WMPs and the end of implicit guarantees

Wealth management products (WMPs, 理财产品) are investment products sold by Chinese banks and other financial institutions to retail and corporate investors. They are a cornerstone of China's financial system, with over RMB 30 trillion (approximately USD 4 trillion) in assets under management as of 2024. For Chinese savers, WMPs have traditionally been the primary alternative to low-yield bank deposits.

WMPs are not bank deposits. They are investment products that pool investor funds and invest in various assets: bonds, money market instruments, equities, and sometimes more complex structures. Returns depend on the underlying investment performance. Historically, however, many investors treated WMPs as if they were guaranteed by the issuing bank — a perception that regulators have been working to change.

For foreign investors in China, WMPs are generally not directly accessible. Most products are sold only to Chinese citizens or to foreign residents through limited channels. However, understanding WMPs is important context for anyone interested in China's financial system, and some foreign banks in China offer similar structured products to their clients.

China's WMP market emerged in the early 2000s as banks sought to offer higher-yield alternatives to regulated deposit rates. It grew rapidly, reaching over RMB 30 trillion by 2020.

Market evolution:

The key turning point was the 2018 "New Asset Management Rules" (资管新规), which set a transition period ending December 2021 for transforming the market from implicitly guaranteed products to net asset value (NAV) products where investors bear true investment risk.

For years, Chinese banks sold WMPs with an implicit guarantee: investors expected that even if the underlying investments performed poorly, the bank would make them whole. This expectation was often reinforced by banks' marketing materials and by the reality that few WMPs had ever lost money.

Why implicit guarantees formed:

- Deposit rates were regulated and low; WMPs offered higher returns

- Banks marketed WMPs aggressively, often blurring the line with deposits

- Reputation risk: banks would rather absorb losses than disappoint retail investors

- Regulatory tolerance: implicit guarantees were not explicitly banned

Why they were problematic:

- Moral hazard: Investors didn't assess risk, assuming bank protection

- Misallocation of capital: Funds flowed to risky projects without appropriate pricing

- Systemic risk: If a major WMP defaulted and the guarantee wasn't honored, panic could spread

- Shadow banking: WMPs were often used to circumvent lending restrictions

The 2018 reforms aimed to break this system. Banks were required to shift to net asset value (NAV) products where the value fluctuates with underlying assets, and investors explicitly bear investment risk.

Since the end of the transition period in January 2022, all new WMPs must be NAV-based products. This means:

Key changes:

- Value fluctuates: WMP unit prices change daily based on underlying asset values

- No promised returns: Marketing shows historical performance, not guaranteed yield

- Investor bears risk: If underlying assets decline, investors can lose principal

- Transparency: Regular disclosure of holdings and performance

Product types under the new regime:

The reform has been successful in changing expectations, but not painless. Some investors were surprised to see WMP values decline during market stress, leading to complaints and withdrawals. This was the intended outcome: investors are learning that WMPs carry real risk.

Modern WMPs invest in a range of underlying assets, with transparency requirements varying by product type.

Common asset allocations:

Closed-end vs open-end WMPs:

- Closed-end: Fixed term (30 days to several years); cannot redeem early; typically higher yield

- Open-end: Daily or periodic redemption; lower yield; higher liquidity

Banks now clearly disclose these allocations in product documents. Read the prospectus carefully before investing.

Despite the reforms, WMPs carry meaningful risks that investors should understand.

Key risks:

Historical WMP issues:

- In 2020, several WMPs invested in China Energy conglomerate bonds suffered losses when the company defaulted

- During market volatility, some WMPs showed negative returns for periods — shocking investors accustomed to guaranteed returns

- Some WMPs invested in "non-standard assets" (real estate, trust loans) faced redemption issues when markets tightened

The reform means these risks are now visible and priced. Investors should not assume that WMPs are safe simply because they are sold by banks.

For foreign nationals in China, accessing WMPs is more restricted than for Chinese citizens.

Availability:

- Most WMPs are sold to Chinese citizens with valid Chinese ID

- Some banks offer WMP-like products to foreign residents with work permits, but selection is limited

- Foreign banks in China (HSBC, Standard Chartered, etc.) offer structured products and wealth management services to foreign clients — these are not the same as domestic WMPs but serve similar purposes

If you have access:

- You will need a Chinese bank account and valid residence permit

- Products available to foreigners typically have lower risk profiles

- Returns are often lower than products available to Chinese citizens

Alternatives for foreign residents:

- RMB time deposits: Lower yield (1.5-2.5%) but simpler and guaranteed

- Foreign bank wealth management: Structured products, funds, and portfolio services

- Brokerage accounts: Bond funds and money market funds through securities firms

For most foreign residents, WMPs are not a primary investment consideration. The market is designed for Chinese savers, and foreign access is a footnote. Focus your investment planning on assets you can access through standard channels.

How do WMPs compare to other savings and investment options in China?

For Chinese citizens, WMPs remain a core allocation for savings exceeding deposit insurance limits (RMB 500,000 per bank). The NAV reform has made them true investment products rather than disguised deposits.

For foreign residents, the practical path is to focus on products you can access: foreign bank wealth management, brokerage-based funds, or RMB deposits.

The evolution of WMPs reflects broader themes in China's financial development.

From implicit to explicit risk: The NAV reform is part of China's effort to create a more mature financial system where investors understand and price risk. This is essential for long-term financial stability.

Interest rate liberalization: WMPs emerged because deposit rates were artificially low. As interest rates liberalize, the gap between deposits and WMPs narrows.

Regulatory capacity: The successful implementation of the NAV reform demonstrates regulators' ability to execute complex financial transitions, even when painful for some investors.

Investor education: The experience of WMP investors seeing negative returns for the first time is a learning process. Chinese investors are becoming more sophisticated.

For outside observers, the WMP market is a window into China's financial evolution — from a system dominated by state-controlled pricing to one where market forces play a larger role, even if not yet dominant.

Official sources:

- People's Bank of China: www.pbc.gov.cn — Monetary policy and financial regulation

- China Banking and Insurance Regulatory Commission (CBIRC): Financial institution supervision

- China Banking Association: WMP market reports and statistics

Key regulations:

- "Guiding Opinions on Regulating Asset Management Business of Financial Institutions" (April 2018) — The "New Asset Management Rules"

- CBIRC Implementation Rules for WMP Regulation (2018-2021 transition period)

Market data:

- China Wealth Management Market Annual Report (published by China Banking Association)

- PBOC Financial Stability Report — Section on wealth management

Analysis:

- IMF Financial Sector Assessment Program (FSAP) China reports

- World Bank reports on China's shadow banking

- Academic papers on China's WMP market (available through SSRN, JSTOR)

For foreign residents:

- HSBC China: www.hsbc.com.cn — Wealth management services

- Standard Chartered China: www.sc.com/cn — Banking and investment products