The problem is that they are often not low risk, and can drive investors to take to the streets when products don't pay out as promised.This week, one WMP sold to wealthy investors called Credit Equals Gold No. 1 was on the brink of default when the WMP's issuer, China Credit Trust, refused to assume the product's debt.Luckily, a third party stepped in to cover the WMPs debt. Investors will get everything promised minus the 2/3rd of their last interest payment.
The WMP had a face value of about $500 million, and was supposed to fund the purchase of coal mines in Shanxi province.It was created by Zhenfu Energy Group, a private firm that was borrowing the money to invest in coal mines. Zhenfu turned to the shadow banking sector after being rejected by the traditional banks. Through its WMP it managed to raise about $1.15 billion and promised investors 10% annual returns.
The Industrial and Commercial Bank of China played a role as well :
In retrospect, the Zhenfu story is a familiar tale of reckless financial gambling by individuals who used massive leverage (in this case, 140 to 1) and received help from key players in the shadow banking and formal banking sectors -- Chinese banks and trust companies. Senior ICBC executives from the Shanxi branch, for instance, lobbied hard for CCT to issue Zhenfu's debt. CCT's chief risk officer allegedly overruled his colleagues, who warned about Zhenfu's ability to repay the debt.
Pei argues that instead of having private parties come in and save WMPs from the brink whenever these blowups occur, the Chinese government should be trying to restructure this entire sector systematically.
Instead, he laments, the government will order creditors to roll over debt and this problem will persist.