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Wealth Management Revolution Sees Unprecedented Innovation


China 's First Wealth Management Product Oriented around Liability Management Hits the Market

(July 18, 2007, Shanghai) Today the Industrial Bank officially launched its “LLB”, which is China's first wealth management product to be oriented around liability management. Unlike the many kinds of investment-appreciation based wealth management products that are currently offered by domestic banks, the purpose of the “LLB” is to ease borrowers' cost of debt in a long term and stable fashion. This is a move away from a norm in which wealth management products offered by banks only offer an “increase” and not a “decrease”. This is a highly innovative move that will prove to be revolutionary to the domestic retail wealth management market.

Amidst the backdrop of a growing economy and an increasingly wealthy population, financial institutions such as banks, securities companies, insurance companies and fund management companies are placing an increasingly large emphasis on personal wealth management services, with an almost constant wave of wealth management products hitting the market. However, at present, the domestic wealth management market is centered on asset management, i.e. customers gain investment returns based on the amount of capital invested. This is the case for bank wealth management products, stocks, funds and bonds. However, there is a notable absence of wealth management services, best represented by personal housing loans, which are based around liability management in the domestic market. The “LLB” released by the Industrial bank is here to fill in this gap. In releasing such a product, Industrial Bank has become the first commercial bank in China to deal in retail wealth management products oriented around liability management.

As the Chinese economy enters a period of interest hike, borrowers have a much more pressing need to reduce the financial pressure brought about by debt, especially those with mortgages of 10 years or more. The first wave of “LLB” products are aimed at clients with personal housing loans. Considering the fact that most mortgage borrowers have limited capital, “LLB” products are purchased in the form of performance bonds, i.e., the borrower purchases a certain amount of “LLB” products according to the size of the loan taken from the Industrial Bank. However, the borrower is not required to offer payment of the funds for wealth management, but is only required to offer payment of a performance bond that equals 3% of the nominal wealth management capital. The borrower is then entitled to receive gains according to the “LLB” nominal amount. These financial gains reduce the pressure that the borrower faces from housing loan interest.

Supposing that a client has applied for a 10 year personal housing loan to the sum of RMB 1 million Yuan, that annual loan interest rate is 6.12% and that the loan is returned in straight-line repayment. According to the regulations of the “LLB” wealth management products, the maximum amount of “LLB” that the client can purchase stands at 5 times the amount of the loan taken from the bank, which in this case is RMB 5 million Yuan. The client can use up to RMB 150,000 Yuan to purchase “LLB” with a nominal value of RMB 5 million Yuan. This 150,000 is a performance bond that equals 3% of the nominal wealth management funds of 5 million. Thus the client is entitled to receive “LLB” wealth management returns based on the nominal capital sum of RMB 5 million Yuan. In this case, it is expected that interest payments on the housing loan can be reduced by RMB 298,000 Yuan.

A spokesperson from the Industrial Bank explained that the “LLB” is a long term liability management oriented wealth management product with a period of 10 years that is tied to the USD swap interest rate and based on interest rate swap. It falls into the category of a non-principal-guaranteed wealth management product. Gains are made from interest rate swap offset balances and investment of margins. As a liability management based wealth management brand, “LLB” is set to become available to a wider range of organizations and individuals that have debts as well as a certain risk tolerance capacity.

Industrial Bank vice-Chairman Chen Dekang said “The Industrial Bank remains committed to providing its clients with a wide range of services that are high in quality and worth relying on. The arrival of our “LLB” products has gone a long way to show the Industrial Bank's capabilities in the innovation of retail products. In addition to further improving our financial services chain, the release of “LLB” has also raised the core competitiveness of the Industrial Bank in the retail service sector. The arrival of “LLB” means that the Industrial Bank has become the first wealth management bank in China to possess a fully complete product range that spans from asset management right down to liability management”.