China’s zero-Covid retreat sparks wealth management product sell-off

Beijing’s retreat from its zero-Covid policy is causing chaos in the country’s Rmb29tn ($4.1tn) market for wealth management products, with some fund managers having to freeze withdrawals or sell down their holdings as they struggle to cope with a rush of redemptions by investors.

Half of the country’s 31,000 outstanding fixed-income WMPs have reported a decline in value since the government first signalled that it would relax its strict approach to Covid-19 on November 11, according to public records.

Wind, a financial data provider, reported that 1,837 fixed-income WMPs, a major source of funding for China’s bond market, were trading below par value as of December 12, compared with 256 at the beginning of November.

WMPs are investment products typically issued by banks and property developers to retail investors. Investors seeking stable returns piled into relatively conservative bond-focused WMPs as Chinese markets slumped because of Beijing’s pandemic lockdowns and a long-running property crisis. The CSI 300 index of Shanghai- and Shenzhen-listed stocks fell more than 20 per cent between July and October.

The November 11 announcement reversed these trends, as stock market investors hoped that the new measures would boost the economy, corporate profits and share prices. Jeffrey Zhang, a Shanghai-based asset management executive, said that the “economic outlook brightened significantly” as a result. The government’s subsequent decision to scrap zero-Covid controls, announced on December 7, has further fuelled share traders’ optimism.

The yield on one-year Chinese Treasuries, which rises when underlying bond prices fall, had increased to 2.3 per cent as of December 12, compared with 1.7 per cent at the beginning of November. Rising yields forced Chinese companies to cancel Rmb131bn worth of bond issuance in November, the highest level since September 2021.

This sparked an even bigger wave of redemptions as WMP investors lost faith in the products and worried about incurring additional losses. As more money has been pulled from the WMP market by this dumping, bond fund managers have been selling down their holdings to meet the redemptions in a self-reinforcing cycle.

“The panic selling could carry on for a while as a negative feedback loop has been formed,” said Huang Da, a bond fund manager based in Hangzhou, the capital of eastern Zhejiang province.

Some banks, especially smaller local lenders, have also been selling down their WMP holdings, in order to raise funds for government-mandated relief measures aimed at boosting the property sector, according to a senior Chinese bank executive.

“Regional lenders have had smaller increases in deposits over the past three years,” the executive said. “To support the property sector, they need liquidity. An easy option for them is to sell [WMPs] to replenish capital.”

One popular WMP issued by China Merchants Bank stopped taking withdrawal orders on November 16 as it struggled to keep up with the influx. More than Rmb200mn was withdrawn from the WMP on that day, an amount equivalent to about 10 per cent of its assets.

“There was too much money in the bond market,” said Larry Hu, Macquarie’s Hong Kong-based chief China economist.

China’s central bank had added to the pressures building on the bond market on November 15, by trimming its one-year medium-term lending facility to Rmb850bn from Rmb1tn in October.

“The People’s Bank of China thought there was too much market liquidity,” said Hu. “The tightening was aimed to prevent funds from circulating in the financial system without entering the real economy.”

While the PBoC changed tack and injected new liquidity into the market on November 17, traders said the central bank was unlikely to relax significantly more for fear of further weakening the renminbi against the dollar and exacerbating capital flight pressures.

“The WMP redemption drive will get worse before getting better,” said Huang.

Additional reporting by Cheng Leng in Hong Kong and Tom Mitchell in Singapore