Investors awaken: Fragility in China’s wealth management product market

In this paper, we provide the first analysis of credit flow dynamics in the Chinese market for wealth management products (WMPs) when their information sensitivity changes. Precipitated by the bond market selloff following the unexpected COVID-19 policy relaxation in 2022Q4, a shift in risk perceptions amplifies WMPs’ sensitivity to performance and triggers significant outflows once net asset values fall below a threshold. As WMPs become more information sensitive, investor flows exhibit a flight-to-cash pattern. Products with lower redemption frequencies experience smaller outflows, consistent with the notion that they are a poorer substitute for cash. WMP issuers respond to outflows by imposing redemption gates and shifting issuance away from fragile products. • Bond shock in late 2022 heightens information sensitivity in China’s WMP market. • Investor flows become more return-sensitive after the shock. • NAV losses beyond a threshold trigger large redemptions. • Investors reallocate toward cash-based WMP products. • Issuers respond with redemption gates and less-fragile product offerings.