(Yicai) July 16 --  Chinese banks offering wealth management products have begun exploring new investment portfolios in the face of lower returns as bond yields sink.

With fixed income becoming less attractive and the higher risks associated with equities, the wealth management industry is moving in the direction of designing more complex and flexible products, said Wang Hongying, president of the Institution of Financial Derivatives of China.

At a time when gold prices are at record highs, many wealth managers have already brought out 'fixed income plus gold' products, linking to assets classes such as gold exchange-traded funds, gold options, and spot gold assets.

Investments in WMPs likely increased by more than CNY1 trillion (USD137.6 billion) to over CNY29 trillion (USD4 trillion) in the first two weeks of this month, according to estimates. But with the recent bond market volatility, net value changes and falling yields continue to impact the industry.

The performance benchmark of WMPs issued last month was 2.97 percent, down from 3.06 percent a month earlier, per data from Pystandard. The return on financial products dropped across the board, with the average annual yield on open-ended fixed-income WMPs at 2.81 percent, down from 3.25 percent, having fallen for three straight months.

The yields on pure bond products fell in the first week of July from the prior week, while the net value of short-term bond products fell by 0.03 percent, according to research by Huaxi Securities. The rate of return of medium- and long-term bond products slid to 0.02 percent, while that of debt hybrid products was 0, down 0.06 percent.

Yields fell mainly in anticipation of the central bank selling treasury debt, a market source told Yicai. The People’s Bank of China announced on July 1 plans to borrow sovereign bonds from primary traders in the open market “in the near future” so as to “maintain the stable operation of the bond market.” 

The PBOC has inked agreements with major financial institutions, making hundreds of billions of yuan of medium- and long-term notes available to borrow, a news outlet affiliated with the bank reported on July 5. It will borrow the bonds through an open-ended, credit-based method and continue to borrow and sell them based on the bond market’s operation.

Looking ahead to this half of the year, industry insiders said market volatility may increase due to central bank operations and government bond sales. While the likelihood of a significant upward trend in yields is low, the room for further significant short-term declines is also limited, suggesting overall volatility, said Wang Haibo, a fixed income analyst at China International Capital.

The annual return on WMPs may drop to slightly above 2 percent in the second half, noted Liao Zhiming, a banking analyst at China Merchants Securities, adding that expectations should be lowered after bond yields fell sharply.

Editor: Martin Kadiev