Wealth management products like Evergrande's are a big hidden risk for China's troubled property market, economists say

Evergrande supports wealth management products Marc Fernandes/NurPhoto via Getty Images
According to an economics consulting, wealth management products are a hidden threat to China's troubled sector of property.

Pantheon Macroeconomics stated that WMPs had allowed developers to pass government debt tests, hiding balance sheet risks.

Developer Kaisa did not pay WMPs last week and Evergrande also failed to pay on products.

According to economists from consultancy Pantheon Macroeconomics, wealth management products (WMPs), are a "lurking-off-balance sheet risk" in the troubled Chinese property markets.

Evergrande, a Chinese property developer, has been protested by investors for not making payments on WMPs it had promised.

Kaisa, a developer, saw its shares fall after it failed WMP obligations. It stated that it was under "unprecedented" pressure on liquidity.

WMPs, which are Chinese financial products, offer fixed returns to investors that are usually much higher than bank deposits. These products are particularly popular with Chinese retail investors who have grown in popularity over the past decade.

These products can often be opaque and linked to companies or sectors such as construction or real-estate. These products can be extremely risky, and regulators have tightened their rules over the past decade.

Banks often issue WMPs, but property developers sell the products to raise money and finance their activities without increasing their debt.

These products pose a hidden risk to China's already troubled property market, according to Craig Botham, Pantheon Macroeconomics chief China economist.

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With its "three red lines" policy, the Chinese government has been reducing balance-sheet debt. However, WMPs are not listed on balance sheets. Kaisa has passed all three red line debt tests, but is struggling to fulfill its obligations.

Botham stated in a Monday note that they represent an off-balance risk to the sector in general. "The chaos that is engulfing Kaisa underscores how opaque property risks still remain."

Kaisa's default in WMPs payments to Kaisa is concerning because it is a yuan denominated payment and cannot be attributed to a currency mismatch. Botham stated that Kaisa's inability to repay yuan debts bodes ill for the chances of repaying foreign currency borrowing.

Pantheon Macro stated that Kaisa is China’s 25th largest property developer. It also happens to be its third-largest debt borrower in dollars, with $3.2 Billion of dollars maturing this year.

According to the economics consultancy, property developers like Evergrande or Kaisa are making matters worse by selling properties quickly in order to raise funds or fund their activities. They said that this will only increase the pressure on Chinese property values, which have already started to fall on a monthly basis.

Holders of Evergrande's offshore bonds were not yet due to receive their interest payments on Monday, Reuters reported.

Evergrande is among the most indebted companies in the world. Fears of contagion in China's economy have erupted because Evergrande is so indebted. Although it avoided default in October, Evergrande will still have to pay two large offshore interest payments by the end of this year.

Evergrande, Kaisa didn't respond to our requests for comment.


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