2019-10-14 Bloomberg Businessweek-Europe Edition

◼ FINANCE Bloomberg Businessweek October 14, 2019

32

to an alleged fraud by a Chinese conglomerate.

Shares of Noah, one of China’s biggest indepen-

dent wealth managers, have tumbled 38% in the

U.S. in the past three months. “I wouldn’t be sur-

prised to see some losses,” says Jasper Yip, Hong

Kong-based principal of financial services at Oliver

Wyman,a consultingfirm.“Moreborrowerswill

runintopaymentdifficultiesina slowingeconomy.”

Therepercussionscouldbesignificantif losseson

suchproductsfuela broaderretreatfromhigh-

yieldassetsintheworld’ssecond-largesteconomy.

Onefactorthatconcernsanalysts:Theproductsare

opaqueandregulationis minimal,sonobodyknows

exactlyhowmuchmoneyis atrisk.

Theindustryhasexperiencedbreakneckgrowth.

Assetsundermanagementata Noahunitthatstruc-

turesitsownproductsclimbed40%,to169.2billion

THEBOTTOMLINE China’sregulatorshavesoughttoreinin

so-called shadow banking, but independent wealth managers that

work with the affluent have received less scrutiny.

That’s allowed them to ramp up exposure to

riskier debt and offer higher yields. Marketing

materials for some of Noah’s products show an

expected annualized return of 7.7% for an invest-

ment duration of nine months, five times higher

than the benchmark deposit rate.

Criticsofindependentwealthmanagerssuch

asSunJianbo,presidentofChinaVisionCapital

ManagementinBeijing,arguethatthefirmsoften

understatetherisksoftheirproductswhenmarket-

ingtoinvestors.Thatworryhasonlyincreasedin

recentmonthsasChina’seconomyhasslowedto

theweakestpacesinceatleast 1992 andthenation’s

companieshavedefaultedondomesticbondsat

thefastestpaceonrecord.

Noah’sfailuretospottherisksoflendingto

CamsingInternationalHoldingLtd.,theconglom-

erateit accusesoffraud,providedanotherreason

forcaution.Camsing’schairwomanwasdetained

byChinesepoliceinJune.TheCamsingcaseis

stillunderinvestigationbypolice,whohaven’t

announcedanycharges.Noahsaysit’soffering

loansata preferentialratetosomeclientswhose

moneyis tiedupintheaffectedproducts.Camsing

andtheChinaSecuritiesRegulatoryCommission

didn’trespondtorequestsforcomment.Jupai,

whosestockhasdropped50%ontheNewYork

StockExchangethisyear,didn’treplytoquestions

onitsmarketperformance.

Becauseindependentwealthmanagersfocus

onaffluentinvestors,theymayposelessofa sys-

temicriskthanbankwealthmanagementproducts

thatcatertothenation’smasses.TheCSRCpub-

lisheddraftrulesinFebruaryforwealthmanagers

anddistributorsofinvestmentproductsthatwould

increasepunishmentsforthosethatfailtodisclose

risksproperly.TheShenzhenAssetManagement

Associationlastmonthpublisheddraftruleson

windingdownproductsthatrunintotrouble,say-

ingthatsomewealthmanagershavefailedtomeet

professionalstandards.

The proposed regulationswillhelp reduce

risks,buttheindustry’sproblemsareprobablybig-

gerthanmostinvestorsrealize,accordingtoLiu

Shichen, Shanghai-based head of research at Z-Ben

Advisors, a fund management research firm. That’s

partly because many wealth managers have been

using their own capital to make clients whole when

products suffer losses, he says. (Noah and Jupai say

they don’t use their own cash to repay investors.)

“What we have seen is only a fraction of the prob-

lematic products,” Liu says. �Bloomberg News

● Fall in Noah shares in

the past three months

38%

yuan,inthetwoyearsendedinDecember2018—a

period when the broader Chinese shadow banking

system shrank because of tighter regulation.

At Jupai Holdings Ltd., another U.S.-listed inde-

pendent wealth manager, assets under sole or

shared management havemore than quadru-

pledsince2015,to56.8billionyuan,accordingto

thecompany.Officialindustrywidefiguresdon’t

exist,butNoahestimatedin 2016 thatChinahad

morethan8,000independent wealth managers.

While the firms offer a wide variety of invest-

mentsincludingplain-vanillamutualfunds,many

oftheproductsarebackedbyhigh-yieldloansto

companies—often property developers—that lack

accesstotraditionalsourcesoffunding.Becausethe

creditproductsaresoldonlytoinvestorswhohave

atleast 3 millionyuanoffinancialassetsorhave

earnedanaverage500,000yuan in the past three

years, they fall outside the increasingly strict rules

governing mainstream wealth management prod-

ucts offered by Chinese banks.

DATA:NATIONALBUREAUOFSTATISTICSOFCHINA,BLOOMBERG

China’s Shaky Debt and Slowing Economy

Domestic bond defaults by

issued amount,in yuan

Real GDP growth

Q1’14 Q3 ’19

50b

25

0

Q1’14 Q2 ’19

7.50%

6.75

6.00