A (sort of) happy ending for Huaxia customers has worrying implications for everyone else

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China’s big, smoking hot potato—the reimbursement of a prominent wealth management product (WMP) that went bust—has been resolved at last. Anticlimactically, as it turns out, since it raises more questions than it answers about what it might mean for China’s banks.

The issue, as we discussed recently, involves Huaxia Bank, which raised 119 million yuan ($15.9 million) on a product that promised 11-13% annual yields, only to see one of product’s income stream collapse the way pyramid schemes are wont to do.

But though sold through the bank, the WMP was not explicitly or legally backed by Huaxia Bank, but rather by Zhongfa Investment Guarantee Co. and Commercial Finance Asset Management Co.

Though the Shanghai Daily says that Zhongfa acquired the underlying investment plan, Caixin, China’s most reputable business journal, reports that it’s unclear who exactly repaid the 80 investors their principal.

One thing does appear clear, though: Huaxia didn’t. Banking analyst Luo Jing at CICC’s equity research arm applauds this development. He says it is a salubrious sign for the banking industry, since WMP investors will not be able to expect “unlimited responsibility” from the banks that sold them a given product (link in Chinese). By extension, the Chinese banking system may be insulated somewhat from the exposure to the some 13 trillion yuan in WMPs that Huaxia’s liability would have implied.

Maybe so. But someone paid. And this illustrates once again the “shadow” part of China’s burgeoning banking business, with banks packaging these products as an alternative to loans, securitizing them as “trusts” before passing them on to (hopefully, increasingly suspecting) customers. (Worse still, as we reported yesterday, many WMPs contain corporate bonds that, themselves, are securitized bad debt.)

And then the final step: brushing these loans-by-any-other-name off their balance sheets. That part has proven highly seductive for China’s WMP-selling banks so far. And with banking profit expectations down and, now, Huaxia escaping its WMP mess scot-free, it’s hard to see why that seduction might fade. There’s also little to reassure investors that the happy ending for Huaxia clients this time will repeat itself.