Financial "picky eating" in non-standard assets: high returns can't hide the hidden concerns of "exceeding" proportions

Li Yunqi China Securities Journal

Recently, several wealth management companies have released their 2025 annual reports for wealth management products. China Securities Journal reporters found that many wealth management products invest a large proportion in non-standardized debt assets. Financing customers are mainly local government financing vehicle (LGFV) companies and internet lending companies. Experts believe that wealth management products favor non-standardized assets primarily because they have three distinct advantages: “high returns, low volatility, and easy matching.” However, the “Administrative Measures for Banking Wealth Management Subsidiaries,” issued on December 2, 2018, stipulates that at any point in time, the total balance of all wealth management products of a banking wealth management company invested in non-standardized debt assets may not exceed 35% of the net assets of the wealth management products. Some products breach regulatory ratio limits, hiding multiple risks.

Wealth management products heavily invested in non-standardized assets

Recently, several wealth management companies have disclosed the 2025 annual reports of their products. Some products favor non-standardized assets; the proportion of non-standardized assets in their ending allocation relative to total assets reaches 40%-50%.

Taking an onshore corporate commercial bank wealth management company’s fixed-income wealth management product with a term of 386 days as an example, after look-through at period end, the proportion of the non-standardized debt assets invested in by this product relative to total assets is 43.09%. From the details of the top ten assets held at period end, a trust loan issued by a trust company to an LGFV company in a county in Zhejiang Province is the asset with the largest investment in this wealth management product; this asset’s balance at period end accounts for 43.21% of the product’s net asset value.

Meanwhile, a closed-end fixed-income wealth management product under a joint-stock bank wealth management company also shows similar circumstances. Based on the information on the top ten holdings as of the end of the fourth quarter of 2025, the top four assets to which the product allocates are trust loans issued by a trust company to four LGFV companies respectively; the proportion of non-standardized assets to the product’s total assets is 43.96%.

In addition to disclosures in periodic reports, some wealth management products also disclose the proportion of investments in non-standardized assets in reports of changes in non-standardized debt assets. A fixed-income, closed-end, net value-based wealth management product under a state-owned big bank wealth management company recently issued an announcement stating that it made a new investment in a trust loan, whose financing customer is an LGFV company in a city in Zhejiang Province; the new asset accounts for 48.45% of the portfolio.

According to the notice issued by the former China Banking Regulatory Commission regarding matters related to regulating the investment and operation of banking wealth management business, non-standardized assets refer to debt-type assets that are not traded in the interbank market and the securities exchange market, including but not limited to credit assets, trust loans, entrusted receivables, bank acceptance bills, letters of credit, various beneficiary rights (receivable rights), equity-type financing with repurchase clauses, and others.

Reporters’ statistics show that the non-standardized assets with relatively heavy investments by wealth management products mainly include trust loans and non-standardized assets with internet lending as the underlying asset. Among them, the financing customers for trust loans are mainly LGFV companies across different regions. In addition, interbank borrowing, stock pledged repurchase, asset income rights, and so on are also often included in the investment lists of wealth management products.

Features: high returns and low volatility

Reporters learned that multiple wealth management products allocate a large proportion to non-standardized assets, mainly because they are valued for their “high returns and low volatility,” and because non-standardized assets can also be matched by term with the wealth management products.

Due to taking on certain credit risk and liquidity risk, non-standardized assets often offer relatively attractive yields. Taking the aforementioned wealth management product under a state-owned big bank as an example, the newly added trust loan investment to an LGFV company has an annual yield of 4%. Based on disclosed data from the wealth management companies, non-standardized assets with internet lending as the underlying asset have a lower annual yield of 2%-3%. Trust loans to LGFV companies with lower credit ratings have an annual yield of 5%-8%, which is clearly advantageous compared with standardized bonds.

Zhou Yuanfan, Chief Economist at Anrong Credit Rating, said that against the backdrop of continued declining bond market yields, non-standardized assets typically come with higher risk premiums because they have lower information disclosure requirements and poorer liquidity. Their yields are significantly higher than standardized bonds with the same tenor. Allocating wealth management products to non-standardized assets can raise the overall return of the investment portfolio, which is crucial for some bank wealth management clients seeking stability and higher returns.

In addition, allocating to non-standardized assets can also help smooth net value fluctuations. A person working on valuation and accounting at a wealth management company told reporters that currently, the valuation methods for non-standardized assets are the amortized cost method and the discounted cash flow method, and the amortized cost method is mainly used; “valuation volatility is not too large.”

Zeng Gang, Deputy Director of the National Institute of Finance and Development, said that standardized bonds need to be valued using the fair value (mark-to-market) method, and net value volatility is more pronounced. Non-standardized assets generally use the amortized cost method for valuation, and the net value curve is smoother, which helps reduce redemption pressure and maintain the stability of the net value curve, making it attractive to investors with relatively low risk appetite.

In addition, non-standardized assets are an effective tool for asset-liability management in wealth management products. Zhou Yuanfan believes that unlike standardized bonds, whose tenor is fixed, non-standardized assets usually offer “tailor-made” flexibility; their financing tenor can be precisely designed according to the fund-raising situation of the wealth management product and the tenor on the liability side. This enables wealth management product managers to perform asset-liability management more efficiently.

Multiple risks cannot be ignored

In fact, regulators impose caps on the proportion of wealth management products’ investments in non-standardized assets. The “Administrative Measures for Banking Wealth Management Subsidiaries” stipulate that at any point in time, the balance of all wealth management products of a banking wealth management company invested in non-standardized debt-type assets may not exceed 35% of the net assets of the wealth management products. Since the products mentioned above allocate a relatively high proportion to non-standardized assets, there is some compliance risk.

Credit risk and liquidity risk of non-standardized assets also cannot be ignored. Zhou Yuanfan said that non-standardized assets lack an active secondary market and usually must be held to maturity. Once a wealth management product faces concentrated redemptions, the manager may find it difficult to quickly liquidate assets to respond, which easily triggers a liquidity crisis.

Credit risk of non-standardized assets is also relatively high. An industry insider told reporters that credit risk mainly manifests as selective default by the issuer. Because the audience for non-standardized debt is narrower and the impact is smaller, some issuers repay standardized bonds first when facing funding difficulties. Zeng Gang also said that the credit ratings of issuers of non-standardized debt financing are lower; when the macro environment tightens and the relevant parties’ debt repayment capacity declines, credit default risk will directly hit the product’s net value and may form a chain reaction effect. In addition, non-standardized asset valuations are not transparent and information disclosure is insufficient; investors cannot accurately assess underlying risks. Over time, this will erode the foundation of market trust and damage the healthy ecosystem of the wealth management market.

The aforementioned industry insider also told reporters that currently some wealth management companies invest in non-standardized assets backed by internet lending as the underlying asset, but he found that wealth management companies do not have a deep understanding of such assets; more often, they invest based on a belief that “big-name companies will not default.” When facing non-standardized assets with relatively complex structures, wealth management companies find it difficult to conduct thorough research.

Zeng Gang suggested that risk could be reduced by focusing on multiple dimensions to lower the risks brought by wealth management products’ large-scale investment in non-standardized assets. First, strengthen look-through supervision and require managers to disclose information on underlying borrowers of non-standardized assets, the purposes of financing, and collateral situations one by one, compressing the operational space for structural avoidance so that regulators can truly “see and manage.” Second, strictly enforce ratio limits; regulators should increase the frequency of on-site inspections, implement differentiated regulatory measures for institutions that exceed standards, form effective compliance constraints, and avoid the phenomenon of “rules on paper but discounted enforcement.” Third, promote the standardized transformation of non-standardized assets: encourage non-standardized assets that meet conditions to be converted into standardized assets through asset securitization (ABS) and other methods, improving liquidity and pricing transparency fundamentally and improving asset structure at the root. Fourth, establish a liquidity stress testing system, requiring managers to periodically simulate extreme redemption scenarios, prearrange liquidity reserves and contingency disposal plans, shift the risk control gate forward, and effectively protect investors’ rights and interests.

(Editor: Qian Xiaorui)

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