Huaxia Bank is a test of what happens when a wealth management product (WMP) goes wrong. The bank says an employee in its Shanghai branch illegally sold a WMP, which Chinese media reported had then failed to repay investors. It's not yet clear which path regulators will take. One option is to force Huaxia to pay investors back in full, setting a precedent that banks are liable for the products they sell. The alternative is to leave buyers dangling.

Ultimately, the best solution is to lift China's deposit cap. If banks could compete for deposits, they would suck cash out of WMPs and back into bank accounts. Lenders would lose fee income and see margins squeezed, and some shadow borrowers would get into trouble, but the sector would quickly shrink.

WMPs aren't evil. But mispricing and widespread selling to customers, who don't really understand the risks, make them dangerous. If Huaxia proves a turning point, its long-term legacy could be a healthier financial system.

The author is John Foley, a columnist.