One of the most significant anomalies in China’s recovery from the COVID outbreak has been the anemic pace of household and consumer spending. An unexamined piece of this puzzle is household asset allocation preferences, which have meaningfully shifted, with PBOC survey data indicating households are reducing spending to try to accumulate wealth through higher-yield investments. Their preferred investment vehicles have changed from shadow banking products such as wealth management products (WMPs) and trust loans, toward equities and fund management firms, in part because the implicit guarantees on shadow banking products no longer appear solid. This shift is positive for the equity market in the long term, but also will bring more volatility. More defaults and credit events on shadow banking products are likely as those channels face new regulations and tighter liquidity conditions.
