BoA Merrill Lynch Says Wrong To Brand China Wealth Products As Ponzi Schemes

Chrissy Coleman Asia Correspondent 1 March 2013

BoA Merrill Lynch Says Wrong To Brand China Wealth Products As Ponzi Schemes

Bank of America Merrill Lynch has cautioned about some of the harsher terms it says are used to condemn what are called wealth management products in China.

Amidst concerns that wealth management products in China are not regulated tightly enough, Bank of America Merrill Lynch has said it is an “exaggeration” to label these investment products as Ponzi schemes.

The bank said that while Chinese regulators should step up their prudential regulations to prevent systemic risks on these products and investors should watch for potential pitfalls, “it is an exaggeration to call WMPs as sub-prime and CDO [Collateralised Debt Obligation], or even Ponzi schemes”.

Ponzi schemes are scams where the operator is only able to pay out to existing scheme members by pulling in new money; as soon as inflows falter, the scheme collapses, as happened most dramatically recently with the demise of the Bernard Madoff fraud in the US. 

In the latest BofAML market report, released yesterday, the bank was responding to a recent article in the Financial Times, which reported that the China Banking Regulation Committee may tighten control on WMPs, in order to slow down their rapid growth and better regulate the business.

Three institutions that have had run-ins with the CBRC over investment products are: China Construction Bank, CITIC and Huaxia Bank.

According to the report, potential measures include requiring banks to disclose extensive information about their off-balance sheet investment products sold.


“Banks will be asked to register their wealth management products or WMPs – deposit-like instruments that offer higher yields and are mostly held off-balance sheet – with the local regulator,” unnamed people familiar with the situation told the FT.

Allegedly, capping WMP balances at a certain percentage of a bank’s total assets is also a considered measure.

“Two bankers said they had been informed that the regulator was considering limiting such assets to 20 per cent of their deposit base,” the FT reported.

According to the publication, WMPs currently account  for 10 per cent of total deposits in the Chinese banking system - but three years ago that figure was close to zero. Smaller banks have been particularly aggressive in their issuance of WMPs as a way of attracting new customers and several are already near the 20 per cent mark.

However, BofAML said: China's shadow banking is of a much smaller scale, and much less problematic, than those countries hit by the subprime crisis.”

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