CITIC withholds repayment on WMP

The default of an unauthorized wealth management product (WMP) sold by employees at a China CITIC Bank branch in Zhengzhou, Henan Province, has left investors owed some 40 million yuan ($6.47 million) in repayments, local media revealed Tuesday.

The instrument in question had been made available to local investors in 2011 and allegedly offered returns of up to 10 times higher than a regular deposit account, according to reports. Yet the WMP, which was backed by returns from a local private equity firm, failed to pay out as advertised upon maturity in early 2012. Although protests from investors soon led to a police investigation, the case went unreported until exposed by Chinese media this week.

China CITIC Bank has not commented on the matter or offered any details on compensation for investors.

The risks posed by unregulated WMPs sold by rogue bank staff members have been a growing source of concern for the public and financial authorities since December, when reports broke that a product issued at a Hua Xia Bank branch in Shanghai had left investors empty handed.

Under current industry regulations, bank representatives are only authorized to sell WMPs which have been approved by senior managers and registered with the China Banking Regulatory Commission (CBRC).

But light supervision makes these restrictions easy to circumvent, allowing bank employees to place both authorized and unauthorized instruments with investors, Wu Hong, vice president of the China Banking Law Society, told the Global Times.

Tightening oversight on banks' capital reserves has sent these institutions scrambling to secure capital for loans, and WMPs' promising yields which beat deposit accounts have become popular with investors as well as convenient tools for banks to shore up their balance sheets, said Wu.

Chinese banks issued 28,239 authorized WMPs valued at a combined 24.71 trillion yuan in 2012, up 25.84 percent and 45.44 percent respectively over the previous year, setting record highs both in terms of the number of instruments offered as well as total worth, according to CNBenefit, a Chinese data provider for the WMP market.

Loose industry standards though mean most commercial lenders in China are more focused on churning out WMPs than they are with controlling the risk they present to investors, said Wu.

"This leaves WMP buyers, who are confident in large banks' State connections and the rarity of defaults, vulnerable to fraud," he explained.

In response to mounting fraud concerns, the CBRC in March began requiring domestic commercial lenders who offer WMPs to conduct thorough checks of these instruments.