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Wealth management products like Evergrande's are a big hidden risk for China's troubled property market, economists say

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© Marc Fernandes/NurPhoto via Getty Images Evergrande has backed wealth management products. Marc Fernandes/NurPhoto via Getty Images

  • Wealth management products pose a hidden risk to China’s troubled property sector, according to an economics consultancy.
  • Pantheon Macroeconomics warned that WMPs have let developers pass government debt tests by hiding risks off balance sheets.
  • WMPs guaranteed by developer Kaisa failed to make payment last week, and Evergrande has also missed payments on the products.

Wealth management products (WMPs) are a “lurking off-balance sheet risk” for the troubled Chinese property market, economists at consultancy Pantheon Macroeconomics have said.

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Beleaguered Chinese property developer Evergrande has faced protests from investors for failing to make payments on WMPs it had guaranteed.

On Thursday another developer, Kaisa, saw its shares and bonds tumble after it failed to meet WMP obligations. It said it was facing “unprecedented pressure” on liquidity.

WMPs are Chinese financial products that offer investors fixed returns that are normally much higher than those on bank deposits. They have been particularly popular among Chinese retail investors, a group that has grown rapidly over the last decade along with the economy.

The products are frequently opaque and can be linked to troubled sectors or companies such as in construction or real estate. They can be highly risky and regulators have tightened the rules on them at various points in the last decade.

WMPs are often issued by banks, but property developers have been selling the products as a way to raise money and fund their activities without adding to the debt on their balance sheets.

According to Craig Botham, chief China economist at Pantheon Macroeconomics, these products are a hidden risk in China’s already distressed property market.

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The Chinese government has been cracking down on balance-sheet debt with its so-called “three red lines” policy. But WMPs do not appear on balance sheets. That means Kaisa passed the government’s three red lines debt tests but is now struggling to meet its obligations.

“They represent a lurking off-balance sheet risk for the sector as a whole,” Botham said in a note published Monday. “The turmoil now engulfing Kaisa highlights how opaque property risks remain.”

The economist said Kaisa’s default on WMPs is worrying because it is a yuan-denominated payment that can’t be blamed on a currency mismatch. “An inability to repay yuan liabilities bodes ill for chances of repaying foreign currency borrowing,” Botham said.

Pantheon Macro said Kaisa is China’s 25th-largest property developer and its third-largest dollar debt borrower, with $3.2 billion of dollar bonds maturing before the end of the year.

The economics consultancy said property developers such as Evergrande and Kaisa are making the situation worse by rapidly selling property to fund activities or raise cash. This will “only add to the pressure on Chinese property prices, which have already begun to decline on a monthly basis,” they said.

On Monday, holders of offshore bonds issued by a unit of Evergrande were yet to receive interest payments due on November 6, Reuters reported.

Evergrande is one of the most indebted in the world and its potential collapse has sparked fears about contagion across China’s economy. It avoided default at the last minute in October, but faces two major offshore interest payments before the end of the year.

Evergrande and Kaisa did not respond to requests for comment.

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