ALARMED by a rout that wiped US$4 trillion in value from Chinese stocks, investors are driving demand for bonds by returning to wealth management products.

    The average expected yield of wealth management products fell to 4.8 percent last week, compared with 5.1 percent three months ago, according to data from Chengdu-based consultancy CNBenefit.

    This shows more investors are diverting funds from equities to fixed-income wealth products, said Ping An Securities Co., a unit of China’s second-largest insurer.

    The inflows have helped pushed the 10-year sovereign yield down 12 basis points in July, the first drop in three months, to 3.48 percent.

    While a 10 percent decline in the Shanghai Composite Index sparked memories of the 35 percent plunge from June 12 that shook investor confidence, an ascendant bond market will help achieve the Chinese leadership’s goal of pushing down borrowing costs to support an economy expanding at the slowest pace in six years.

    “A lot of money has flowed back from stocks to banks, which then have a stronger demand for allocation,” said Yan Yan, an analyst at China Guangfa Bank Co. in Shanghai. “When stocks were doing very well, banks needed to boost yields for wealth management products to retain funds, but now their motivation to do so is weaker.”

    Wealth management products are popular in China, offering yields higher than the legally capped deposit rate of 3 percent and a perceived implicit guarantee from the banks that sell them.

    Their assets were 15 trillion yuan (US$2.4 trillion) at the end of 2014, according to the latest available data from the China Banking Wealth Management Registration System.

    The products are part of China’s shadow banking network that facilitates lending outside the regulated banking system.

    Regulators are trying to curb such financing and turn the wealth industry into an asset management business. The China Banking Regulatory Commission in December urged banks to directly invest money raised from wealth management products.

    Managers of wealth management products, which are savings plans that banks sell to circumvent lending restrictions, invest about 70 percent of their assets in fixed-income and bank deposits, according to China Banking Wealth Management Registration System data.

    “Wealth management products yields are to a large extent the risk-free rate to the general public, so this shows funding costs are falling across society,” said Shi Lei, head of fixed-income research at Ping An Securities.

    Managers mostly buy three-to-five-year corporate notes with a rating of at least AA, Shi said. The five-year yield on such bonds fell 33 basis points in July to 5.13 percent. It dropped to 5.11 percent July 24, the lowest since 2010.

    The Shanghai Composite Index dropped for a third day in a row yesterday, losing 1.11 percent. As much as 500 billion yuan had entered shares through wealth management products, Goldman Sachs Group Inc. estimated in January.

    “Wealth management products yields should have fallen earlier this year, but in April and May, the heated stock market gave them a new investment target,” said Li Linxia, a CNBenefit researcher.

    “Now that stocks are getting more volatile, the funds wealth management products had invested in equities are gradually being taken out, and fewer newly issued products are entering stocks,” Li said.

    (SD-Agencies)