After the Bank Run, Where Is the Future of Chinese Wealth Management?

King Ten

Inflation and Recession Central Bank Policy Trends Commodity

Summary:

Since the financial run issue, credit bonds have been very risky, perhaps the redemption of wealth will not stop, but why is it happening? Before November it was the asset shortage, and now it suddenly becomes a debt shortage, wealth stampede redemptions, the decline is huger than equity, and few investors can stand it!

Behind the Bank Run

Yesterday Bloomberg news revealed that the regulation suggested that insurance agencies take back the bonds sold by wealth management. It is just a flow of money from the left hand to the right hand. Where can the money redeemed from wealth management go? Some time ago large certificates of deposit and insurance products were snapped up, and the flow of capital is clear. Now, bank loans are not working, and the money just runs back to the financial markets department of insurance and banks. Do we have to see a certain investment type insurance being run again later? This move is undoubtedly meaningless as the root cause is not solved.

The key point is that the underlying assets of wealth management are based on credit bonds, while the main investors are wealth management, brokerage firms, public funds, and other institutional investors. Previously, by using the cost method or valuation method, the net value of the product will not retract, since the credit bond is not in default, it will always expire. Thus, the high coupon is a steady stream of happiness, so even if the interest rates rise sharply during the mid-way, it is not necessary to passively sell bonds to stop the loss and run. After the release of new rules of capital management for calculating the net value by the fair value, wealth management is getting in trouble. Also, the market is volatile, and the net value of the product will not be maintained, which will further hurt the investors, and therefore redemption is also inevitable.

What Will Be the Future of Wealth Management?

The treasury bonds raised sharply recently, credit bonds are still falling to new lows, and the money flows from wealth management redemption to the bank to buy treasury bonds. Moreover, the current credit bond interest rates are satisfying, but unfortunately, it is difficult for individual investors to enter. What's the lesson this time? There is certainly the valuation problem described above, but the problem of the investors themselves is more significant, including insufficient knowledge about net value, the product, and the risk.

Is the bank run caused by the unattractiveness of price? Obviously, since mid-November, the risk-free rate seems to have moved up sharply, but the ten-year Treasury bond yield also grew up 20bp. If investors experienced financial deleveraging at the end of 2016 and the rapid turn of the bond bear market triggered by the recovery of the pandemic in May 2020, this volatility is normal. The fragility of the market is the key factor in this run on the market! It is better to buy capital preservation and low-yield products if such volatility is unbearable. Additionally, it is estimated that domestic investors will directly choke if they see the volatility of US stock with huge bp fluctuations, which means that our investors are more fragile!

This time, of course, the madness results from the common characteristics of investors: buy when rising and sell when declining. When the net value of the fund rose, investors will increase subscriptions, bank financial investment managers will continue to buy bonds and the net value continued to rise, forming a virtuous cycle. While the net value declines, investors redeem it collectively, and investment managers must sell the product with a loss to cash out. Nevertheless, the whole market is focusing on selling and few investors will buy, leading to the low-price-selling of financial products only cut and sell, and this will form a vicious circle. Thus, it is common for the bond varieties held by the fund products to go up and down 5bps a day.

China's fund industry is very short, starting from the early 1990s, and now has accumulated tens of trillions. Unlike foreign countries with hundreds of years of history, investors are more mature, while Chinese investors are in the stage of enlightenment. Presently, many investors just know to buy the product, without really understanding the product, the stratum assets inside this product, and risk, retracement, or volatility. Probably, financial managers never mention these concepts, but hunting for profits and managing the KYC supervision from authorities. The reality is that there is a complete mismatch between customer acceptability and the product.

What about the future? Will volatility become normal in financial products? If the fair value cost method could not be changed, then the only changeable thing is the investor's ability to accept, to ensure investors know the corresponding risk level of each product, the meaning behind the level, and their acceptance of risk, rather than just cope with R1, R2, R3, R4, R5. Finally, converting from pandemic propaganda: investors should review the risk acceptance and defend the first line of financial products.

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After the Bank Run, Where Is the Future of Chinese Wealth Management?

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