But like savers in the West, the Chinese are starved for yield. The low interest rates offered by the banks, a type of financial repression also practiced in the United States, make Chinese savers susceptible to higher-yielding investments. Foreign markets are mostly off-limits because of capital controls, and China’s own stock markets have proved highly volatile, performing poorly in recent years. China’s bond markets remain immature. Instead, Chinese savers have been attracted by two asset classes— real estate and structured products. The bubble in Chinese property markets, especially apartments and condos, is well known, but not every Chinese saver is positioned to participate in that market. For them, the banking system has devised trust structures and “wealth management products” (WMPs). A WMP is a pool or fund in which investors buy small units. The pool then takes the aggregate proceeds and invests in higher-yielding assets. Not surprisingly, the assets often consist of mortgages, properties, and corporate debt. In the WMP, China has an unregulated version of the worst of Western finance. WMPs resemble the collateralized debt obligations, collateralized loan obligations, and mortgage-backed securities, so-called CDOs, CLOs, and MBSs, that nearly destroyed Western capital markets in 2008. They are being sold in China without even the minimal scrutiny required by America’s own incompetent rating agencies and the SEC. Rickards, James (2014-04-08). The Death of Money: The Coming Collapse of the International Monetary System (pp. 102-103). Penguin Group US. Kindle Edition. ......................................................................................................................................Investors are attracted by the higher yields offered in WMPs. They assume that because the WMPs are sponsored and promoted by the banks, the principal must be protected by the banks in the same manner as deposit insurance. But both the high yield and the principal protection are illusory. The investors’ funds going into the WMPs are being used to finance the same wasted infrastructure and property bubbles that the banks formerly financed before recent credit-tightening measures were put in place. The cash flows from these projects are often too scant to meet the obligations to the WMP investors. The maturities of the WMPs are often short-term while the projects they invest in are long-term. The resulting asset-liability maturity mismatch would create a potential panic scenario if investors refused to roll over their WMPs when they mature. This is the same dynamic that caused the failures of Bear Stearns and Lehman Brothers in the United States in 2008. Bank sponsors of WMPs address the problems of nonperforming assets and maturity mismatches by issuing new WMPs. The new WMP proceeds are then used to buy the bad assets of the old WMPs at inflated values so the old WMPs can be redeemed at maturity. This is a Ponzi scheme on a colossal scale. Estimates are that there were twenty thousand WMP programs in existence in 2013 versus seven hundred in 2007. One report on WMP sales in the first half of 2012 estimates that almost $ 2 trillion of new money was raised. The undoing of any Ponzi scheme is inevitable , and the Chinese property and infrastructure bubbles fueled by shadow banking are no exception. Rickards, James (2014-04-08). The Death of Money: The Coming Collapse of the International Monetary System (p. 103). Penguin Group US. Kindle Edition.
Posted on: Thu, 08 Jan 2015 07:20:24 +0000