Investors Awaken: Fragility in China's Wealth Management Product Market

Abstract

In this paper, we provide the first analysis of credit flow dynamics in the Chinese market for wealth management products (WMPs) when their information sensitivity changes. Precipitated by bond market volatility, a shift in risk perceptions amplifies WMPs' sensitivity to performance, triggering  outflows when their net asset value falls below a certain value. As WMPs become more information sensitive, investor flows exhibit a flight-to-cash pattern. Products with lower redemption frequencies experience smaller outflows, consistent with the notion that they are poorer substitute for cash. WMP issuers respond to outflows by imposing redemption gates and shifting issuance away from fragile products.

Keywords: Fragility, Wealth management product, Regulation reform, Bank and NBFI