As of the end of May, the scale of existing wealth management products continues to grow, surpassing an astounding 29 trillion yuanThis significant increase serves as a reflection of the evolving landscape in China’s financial institution sectors, particularly as banks strive to increase their capital acquisition amid a shifting economic environment.

Despite this positive growth in product scale, various economic factors such as declining deposit rates and lower bond yields have severely impacted the ability of banks to attract new investments into wealth management productsTraditional assets such as cash, deposits, and bonds have seen a decrease in their holding proportions, while mixed products are increasingly coming into prominenceThis shift indicates a growing demand for diversification in asset management, appealing to investors seeking lower risk and higher returns.

Industry experts have pointed out that in a context of falling interest rates and a scarcity of quality investment assets, wealth management companies are finding it increasingly challenging to meet investor demands for high yield with low risk

The challenge lies in optimizing asset allocation strategies to attract investors while also balancing risk and returns, which has become a significant task for financial institutionsFor regular investors, it is crucial to diversify their asset management strategies with a foundation of safety and stability in order to mitigate the risks associated with interest fluctuations.

Since May, there has been a further rebound in the scale of wealth management productsData from Puyin Standard reveals that by May 27, the existing portfolio of wealth management products grew to 29.03 trillion yuanXu Wenchao, a director with Fitch Ratings’ Financial Institutions Group for the Asia-Pacific region, noted that against the backdrop of low interest rates, particularly influenced by the recent prohibition on manual deposit interest adjustments, the comparative advantage of wealth management product yields over traditional deposits has become increasingly evident, driving a trend of funds flowing back into wealth management products

• OPEC+ Delay: What Lies Ahead for Oil Prices?
• Gold Weakens and Declines
• Gold & Silver: Volatile Ahead of Non-Farm Payrolls
• Hedging Options as Bitcoin Breaks $100K Barrier
• Coal Power's Low-Carbon Shift: External Aid & Internal Upgrades

This trend is especially notable in products with minimum holding periods.

It's worth noting the significant increase in products categorized by minimum holding periodsA recent report from GuoXing Securities pointed out that during the period of May 20 to 26, the scale of one-month and shorter-term wealth management products saw a week-on-week growth of 1.41%. Huaxi Securities also indicated that daily-open-type products, which have been affected by cash management products, likewise showed a decline in scale, while other product types maintained growth—most notably, minimum holding period products increased markedly by 110.4 billion yuan to reach 6 trillion yuan.

Market analysts believe the striking growth of minimum holding period products is possibly related to their yield performanceReports from Huabao Securities have illustrated a downward trend in the returns on cash management products and non-daily-open wealth management products this year

However, one-month open-ended wealth management products have performed comparably better, with an annualized return rate reaching 2.59% as of May 19.

From a product type perspective, there has been a notable contraction in the scale of cash management productsObservations from Huaxi Securities indicate that since May, the growth of cash management product scales has diminished gradually until a complete shrinkage occurred, decreasing from 8.4 trillion yuan during the week of May 20 to 24—a fall of 76.2 billion yuan compared to the previous week.

In contrast, there has been a considerable expansion in mixed productsGuoXing Securities reported a week-on-week increase of 113.2 billion yuan in the scale of wealth management child products between May 20 to 26, primarily due to an increase in fixed income mixed products while cash management and equity product scales have fallen.

The transformation in the asset allocation structure of wealth management products is a pivotal factor influencing the trend towards mixed products

Previously, as wealth management products transitioned to net valuation, cash and deposit assets often became the top choices for allocation in bank wealth management.

Puyin Standard’s data illustrates that in the first quarter of 2024, cash and bank deposits accounted for a substantial 84.80% of the asset holdings in newly issued wealth management products—a 2.66 percentage point increase compared to the last quarter of 2023. Conversely, the holding proportion of bonds slipped to 1.57%, down by 1.3 percentage points from the previous quarter, while non-standard debt instruments decreased to 0.06%, diminishing by 1.25 percentage points.

Overall, it has been asserted by Puyin Standard’s researcher, Li Zhenyu, that newly launched wealth management products in the first quarter of 2024 are increasingly favoring cash and deposits, while showing a decreased preference for bonds and non-standard debt assets.

Li emphasized the impact of falling yields on various duration government bonds since December 2023. With bond prices rising and the cost of allocating bond assets in new wealth management products increasing, wealth management companies have had to adjust their strategies

As major banks have made several adjustments to deposit rates this year, pressure has been exerted on the returns from cash and deposit assetsNevertheless, as wealth management products are more sensitive to risks compared to equities or funds, institutions still prefer allocations towards cash and deposits, further reducing their configurations in non-standard assets in order to emphasize the “stability” characteristic of wealth management products.

However, with the onset of the second quarter, declining deposit rates in conjunction with policies hindering manual interest adjustments have resulted in a gradual decrease in the allocation towards cash and deposits within newly issued wealth management productsAnalyst Ai Yawen from Rong360 Digital Technology Institute pointed out that banks are leaning more towards allocative strategies favoring deposits, bonds, and other fixed income products amidst the tightening supply of high-yield deposits and diminished issuance of treasury bonds

Consequently, we see an increasing trend of issues for mixed type products.

The trend of reducing cash and bank deposit allocations is not the only shiftThe allocation towards bond assets in bank wealth management is also noted to be decreasing lately.

According to research by Zhongtai Securities, after the “redemption tide” of wealth management products in the fourth quarter of 2022, there was a dramatic reduction in the total scale of assets held within these productsBy the fourth quarter of 2023, there was a recovery, but the scale of disclosed bond assets dipped to 23.66 trillion yuan in the first quarter of 2024—a 7.36% decrease from the previous quarter.

Moreover, CICC (China International Capital Corporation Ltd) indicated in its latest report that the net buying scale of non-financial credit bonds stood at 12.3 billion yuan from May 20 to 25, which further highlights the current market conditions.

Xu Wenchao comments that due to the contradictions of supply and demand in the bond market and the constraints faced when pursuing higher yield deposits, wealth management companies continually grapple with balancing risks and returns to effectively meet investor demands.

As he indicated, the current market dynamics lead banks to streamline asset allocation while ensuring adequate adjustment of investment strategies

Enhancements in fund investment structures and the flexibility and creativity of allocation strategies are being prioritized.

Furthermore, Li Zhenyu mentioned that investors need to adopt adaptable allocation strategies amidst these diversifying trendsWith the common downgrading of performance benchmarks for wealth management products, individual investors may need to align their expected yield with a more realistic outlookAs asset allocations have turned conservative, it’s essential for individual investors to reassess their strategies pertaining to asset management and pursue diversification to avert risks.

Xu completed that the current situation showcases investors maintaining lower risk appetites while still craving asset appreciation that outpaces inflationInclusion of wealth management products as part of an asset allocation strategy, while not the sole means, suggests that individuals should also consider diversifying into areas such as stocks and funds while retaining a portion of cash.

Increased diversification in investment strategies may lead investors towards more complex approaches, like engaging in alternative investments, cross-border investments, and deriving opportunities from derivative instruments, said Li Zhenyu

In terms of strategic focus, attention towards long-term bonds and commodities such as gold could yield potential benefits as well“Long-term bonds can provide stable income streams particularly under expansive monetary policy, and the issuance of treasury bonds can alleviate the asset scarcity market,” he articulated.

From a market perspective, recent trends reflect a growing willingness among asset management institutions and investors to diversify into ultra-long-term treasury bondsZhang Jinghan from Puyin Standard mentions that ultra-long-term special treasury bonds, characterized by their low-risk fixed income nature, align with the objectives of conservative individual investors seeking stable yieldsThis has led to a shift in funds towards purchasing ultra-long-term treasury bonds as a means of securing long-term returns and planning future cash flows.

Zhang also underscored that the availability of ultra-long-term treasury bonds has partially enriched the supply of bonds, enhancing the configuration choices for fixed income assets in wealth management products