SHANGHAI (Reuters). China’s problems in property have brought to light a new source of off-balance-sheet financing. These are called wealth management product (WMPs), and they are frequently sold to retail investors.

Kaisa Group Holdings is a property developer that claimed its finance division had failed to make a WMP payments. Investor protests have been sparked by missed WMP payments from China Evergrande Group, a cash-starved developer.

This is what you should know about China’s wealth-management products.

What are THEY?

WMPs can be described as investment vehicles, such as those offered by banks or property developers. They are typically marketed to both retail and corporate investors and often pay yields far greater than deposit.

All products issued by banks fall under the fixed-income category, and can be grouped with other investment types such as futures, stocks, or equities.

What are the YIELDS?

There are many. According to the app, China Merchants Bank is one of the largest lenders in China. It offers wealth management products that have an expected yield of between 2.95% and 6%. Ningbo Bank is a regional bank that offers WMPs at an estimated 9.5% yield.

Evergrande on the other hand, offered products with annual returns close to 12%. These products were sold under the Evergrande supplier’s name, but Evergrande guaranteed repayment if they failed.

Although the annualized returns from such products tend to be higher than those of deposit rates, banks are being prohibited from promising investors guaranteed yields.

WHAT ARE THEY RELATED TO?

From 2013, a decade following China Everbright’s (OTC) Bank first wealth management product, the bank regulator ordered banks to reveal all relevant information.

To further regulate bank wealth management products and to curb the abuse of yield guarantees, regulators also issued new asset management rules in 2018. These included bans on yield guarantee schemes and requirements that banks create their own wealth management units.

However, the WMPs that companies like Evergrande sell are not on the radars of insurance and banking regulators and registered in unregulated local financial assets exchanges.

Shenzhen’s city government launched an extensive investigation in September into Evergrande Wealth.

Who Are THE ISSUERS

Chinese banks often set up wealth management units to raise funds for WMPs.

Chinawealth.com.cn reports that there had been a staggering 27.95 trillion Yuan ($4.37 Trillion) in China’s wealth management market. This was despite the fact that nearly 71,000,000 individual investors were holding these products as of the end September.

China’s decades-long efforts to reduce debt have led companies and property owners to look for financing options. Off-balance sheets can be used to secure funding. They are often packaged as wealth management tools to attract investors.

HOW BIG IS THE CORPORATE WEMPS MARKET?

It is unknown if the market’s size has been officially calculated.

Evergrande Wealth, a unit launched by Evergrande in 2016 as a peer-to-peer online lending platform that originally was used to fund its property projects, sold WMPs products to more than 80,000 people – including employees, their families and friends as well as owners of Evergrande properties – and raised more than 100 billion yuan in the past five years, a sales manager there told Reuters. [L4N2QM1U0]

WHY DO THEY ARE SO COMMON?

China’s rapid economic growth has led to a significant investor class. According to HSBC 96% urban Chinese households are owners of property, and over 2 million have funds to invest at least $1.5million.

However, Chinese have been long seeking greater returns on WMPs due to capital controls and limited offshore investment options.

($1 = 6.4000 renminbi)