April 1, 2014 5:38 am JST

Top 4 China banks sold $450B in unguaranteed financial products

YASUO AWAI and NORIYUKI DOI, Nikkei staff writers

HONG KONG -- In a development that could fuel concerns about China's financial system, the nation's four biggest banks disclosed for the first time that they have sold about 2.8 trillion yuan ($450 billion) in wealth management products for which they did not guarantee the principal as of Dec. 31.

     The figure, based on data disclosed by Monday, is equivalent to around 30% of the total balance of such products sold by Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and the Bank of China.

     Wealth management products are a general term for investment vehicles offered to Chinese retail players. Investors can enjoy high returns on instruments whose principal is not guaranteed, but these products include investments in and lending to local-government-backed companies and real estate firms, which the banks tend to avoid lending to themselves. These products, which are generally outside the purview of financial regulators, are considered a key component of China's so-called shadow banking system.

     The balance of unguaranteed wealth management products grew 59% at Bank of China and 37% at China Construction Bank -- the two banks for which comparisons with year-earlier figures are possible. According to banking authorities, the total balance of wealth management products as of the end of last year grew 44% on the year to 10.21 trillion yuan.

     President Yi Huiman at Industrial and Commercial Bank of China, the largest of the four, said at a news conference that it will not guarantee payment since investors bought the financial products at their own risk. Risk is inherent in the world of finance, he said, suggesting that default is a possibility.

     China's securities watchdog toughened rules governing data disclosures regarding wealth management products at publicly traded banks this year, in part to keep the shadow banking system in check. Because products whose principal is not guaranteed are excluded from consolidated financial reports, their disclosure was voluntary until now.

     If the banks allow the wealth management products to default, then real estate firms and others that relied on them to raise money could fall into difficulties, causing the banks in turn to suffer losses. The banks are scrambling to increase their capital to deal with such occurrences. The Bank of China is looking into issuing preferred shares, said President Chen Siqing. Authorities lifted the ban on such shares this year.

     The quartet's combined net profit grew 12% to about 800 billion yuan last year. Although profit is high because the government regulates interest rates, an influx of bad loans has slowed the increase in profit. Industrial and Commercial Bank of China's net profit rose 10% last year, the weakest growth in 11 year