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Low-risk products winning out

By Wang Zhenghua (China Daily)
Updated: 2008-04-17 11:21

Once unpopular wealth management products with a lower degree of investment risk are gaining popularity in the face of bearish domestic and global equity markets.

Banks in China are churning out products promising fixed income or less association with stocks in order to lure investors, many of whom are trapped in a stock market that began to slump in November and shows no prospect of regaining vitality anytime soon.

The benchmark Shanghai Composite Index has plunged by more than 40 percent from its peak in October, closing at 3291.6 points yesterday and causing many individual investors in China to lose money.

Against this backdrop, banks, whose products are traditionally viewed as less risky than individual investments, became attack targets after some revealed no profit or even principal loss for some products investing in the stock market.

One institution widely condemned by investors is China Minsheng Banking Corp, whose product is likely to become the first developed under the Qualified Domestic Institutional Investor (QDII) scheme to terminate operations ahead of its maturity date because of substantial losses.

"We owe an apology to our investors for the product that suffered a huge floating loss because of market turbulence," said Yan Junwei, president of the Beijing-based bank's financial market department.

He said opinions would be collected from investors regarding the fate of the product and promised the bank would be more discreet when designing future products and fully reveal the potential risks.

In a broader picture, many QDII products put forward by banks and fund companies are suffering losses because of the worldwide stock market slump. At least five reported a net assets value lower than the price at issuance, with two dropping more than 30 percent.

By the end of 2007, China's authority had granted QDII licenses to 23 domestic and foreign banks, with 16 of them having created a total of 262 QDII products, soaking up 41.4 billion yuan ($5.91 billion).

Counter to the strategy of churning out products promising higher returns - along with higher risk - when the domestic stock market was flying high last year, banks are focusing on investment products with lower risks, such as products with principal protection or those linked to commodities or hedge funds, as well as products that stick to the market neutral strategy, which are showing popularity among investors.

According to Zheng Yi, a certified financial planner at the Industrial and Commercial Bank of China, the nation's largest lender, the products guaranteeing fixed profit that were put forward by the bank recently were highly popular. Many sold out within an hour of going on sale.

"From the beginning of 2008, the stock market began a substantial correction and market risks are accumulating abruptly," she said. "Many senior and junior stock gamblers and fund buyers are being trapped for the first time."

But turbulent equity markets enhance the attractiveness of low-risk products, as indicated in the rare brisk sale of certificated bonds in many parts of the country, Zheng said.

To cater to market demand, the bank developed a renminbi wealth management product to mainly invest in paper assets, premium corporate trust financing programs and bonds. It is designed with a potential annual return of 4.2 percent within a tenure of 90 days.

Bank of Communications, the nation's fifth largest lender, debuted on March 28 a structure product that is resilient to fluctuations in the stock market with principal protected. Investing in a trust product developed by the local Fortune Trust firm, which is known for a product in the same series that achieved a 65 percent profit in the past year, the bank said the product's attractiveness lies in its potential high yield on the back of low risk.

The popularity of low-risk investment products has also been seen at foreign banks in China. Citibank, one of the largest foreign players in China, reported that since this January, sales of principal protected products have outpaced those without principal protection - a reversal from last year.

Leong Chin Lin, retail banking product director of Citibank China, said more products resilient to market slumps will be promoted this year, such as those linked to commodities and hedge funds, and those with "market neutral" strategies.

In the long run, the banker still views the emerging markets favorably.

David Leung, chief investment officer at Standard Chartered Bank China, advocated the bank's all-weather wealth management plan, which keeps its revenue stream from wealth management sustainable and stresses balanced investment portfolios.

The bank also sees opportunities in the plunging domestic equity market, churning out a renminbi trust product on April 1 that mainly invests in new offerings.