Commentary on Political Economy

Monday 27 February 2023



China Fund Panic Spurs Risky Backtrack on Mark-to-Market Pricing

  • Riskier valuation method regains popularity after bond rout
  • New products could reinforce Chinese investors’ risk aversion

China’s banks and asset managers are turning to an old yet potentially risky accounting maneuver to attract buyers for their investment funds after a rout in the bond market triggered waves of redemptions last year. 

Banks including Industrial and Commercial Bank of China Ltd. and Postal Savings Bank of China Co.’s wealth management units are rushing to sell new funds that value most assets based on adjusted costs rather than current market prices, masking day-to-day volatility. Mutual fund firms also launched their first batch of products this month using a similar method. 

China’s asset managers are seeking to stem an exodus of clients by resorting to the so-called amortized cost accounting method that had been tightly restricted in recent years as regulators sought to bring more transparency to the market. Officials are now showing more tolerance for the method following the sharp bond decline. 

“The large number of amortized-cost products being launched currently smacks of market rescue,” Shanghai-based consultancy Financial Regulation & Law wrote in a report Feb. 3.

More than 20 firms have responded to the easing by launching new products using this type of valuation, according to a China Minsheng Banking Corp. report Feb. 11. Similarly, five mutual fund firms launched so-called mixed-valuation funds for the first time. Penghua Fund Management Co. raised about 8 billion yuan ($1.16 billion) alone.

Representatives for Penghua and the ICBC and Postal Savings Bank units didn’t immediately reply to requests for comment.

The new funds aren’t without risks. By valuing assets using amortized costs, buyers can usually expect to see their investments gradually rise over time as the underlying bonds get closer to maturity. Yet the method can also cover up any wild price swings or defaults ahead of repayment, and undermines China’s push to wean investors off seemingly guaranteed fund returns. The accounting method is often used in the US on assets like money-market funds held to maturity, but less so on longer-term offerings such as the one-to-three year terms typical for these China funds.

“The wealth management firms are adjusting strategies after market conditions shifted,” seeking to shelter clients from market swings after the redemptions, said Zhou Yiqin, president of GuanShao Information Consulting Center, which specializes in financial regulations.


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Investors’ abrupt shift to riskier assets including stocks late last year helped spur the biggest decline in China’s short-term government bonds since mid-2020, fueling a spiral of redemptions. Regulators even asked banks to report on their ability to meet short-term obligations, Bloomberg reported in November. 

The outstanding balance of wealth management products shrank by more than 2 trillion yuan last year and dropped a further 300 billion yuan in January, partly driven by the redemptions, according to estimates by China International Capital Corp. The industry could face another wave of withdrawals in February and March as about 12% of the products are still under their 1 yuan starting price, analysts led by Wei Lulu wrote in a report Feb. 2.

The correction “exceeded people’s expectations,” as investors’ anticipation of stable returns in these fixed-income focused products was dashed by the declines, the analysts wrote, citing surveys of wealth management firms. The increasing share of more volatile bonds in these funds and their lack of liquidity made the expectation gap “particularly alarming.”

To protect against more declines, the new products tend to hold higher-rated bonds of similar durations to maturity, which could prop up demand, according to CICC. 

Regulatory Approval

Mutual funds applied for these so-called mixed-valuation products in the first half of last year but didn’t get approval as regulators weren’t encouraging the method after tightening rules for the industry, according to the Financial Regulation & Law report. The government changed tact after the bond rout made it clear that amortized-cost accounting can help prevent massive redemptions and protect the debt market. 

At the same time, officials are trying to root out implicit guarantees that fueled the industry’s expansion but also increased risks. The use of the amortized-cost method is restricted to closed-end products that hold qualified bonds to maturity. The China Banking and Insurance Regulatory Commission and the China Securities Regulatory Commission didn’t immediately reply to requests seeking comment.

Money managers are well aware of the possibility that these products may rekindle investor expectations of can’t-miss returns.

 “There’s still the risk of fluctuation in fund units’ net value,” Penghua Fund said in its prospectus. “Amortized-cost valuation doesn’t equal principal guaranteed.” 

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