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Chinese Stocks Sink Over Fears Regulators Will Curb Wealth Management Schemes

China’s burgeoning problem with its ponzi-like wealth management product or WMP, industry, is nothing new: we presented a comprehensive summary one year ago in “The 8 Trillion Black Swan: Is China’s Shadow Banking System About To Collapse?”

For those unfamiliar, the outstanding value of WMPs, widely expected to be a major source of future systemic risk for Beijing, rose to 23.5 trillion yuan, or 35% of China’s gross domestic product, at the end of 2015 from 7.1 trillion yuan three years earlier. Much of the growth came in open WMPs, which are extra appealing to investors because they can be redeemed at any time, and thus provide another major duration risk which as we recently saw with commercial real estate funds in the UK, can turn sour overnight. Mid-tier banks such as China Merchants Bank Co. and China Everbright Bank Co. are especially dependent on the products for funding. …

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