The Asia Global Payment Summit. Bali, Indonesia. 10-11 October 2019

Regional Authorities Step up Scrutiny of Structured Deposits

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Local authorities around China are expected to intensify their regulation of structured deposits provided by smaller regional banks.

Sources said to Diyi Caijing that regulators in the coastal province of Zhejiang have called for the suspension of the sale of “fake structured deposits” – which often used by lenders to covertly provide higher rates of return to depositors.

“At present, only a few of the big state-owned banks are providing genuine structured deposits,” said one source. “Smaller banks do not possess the qualifications to engage in derivatives transactions, and it’s easy for risk to proliferate.”

The move comes just after Beijing’s local banking regulator issued the “Notice Concerning the Standardisation of the Undertaking of Structured Deposit Operations” (关于规范开展结构性存款业务的通知) on 6 September, which highlighted the non-compliant use of the products by lenders, and called for banks to standardise their structured deposit operations.

The “Depository Statistical Category and Code Standards (Trial)” (存款统计分类及编码标准(试行)) states that structured deposits are instruments incorporating financial derivatives that are used by financial institutions to accept deposits.

Since the launch of new asset management rules in early 2018 that prohibit the provision of “guaranteed returns” for wealth management products (WMP’s), however, some Chinese banks have turned to the use of “fake” structured deposits as a means offering higher, guaranteed returns to depositors.

Data from Rong360 indicates that the average projected rate of return for commercial bank WMP’s has fallen from 4.91% in February 2018 – when the new asset management rules were launched, to 4.04% in August 2019.

The head of one smaller lender said to Diyi Caijing that the standardisation of structured deposits by regulators will reduce the debt costs and thus lending rates of banks, helping to support the real economy.

He expects the move to create “definite challenges” for smaller banks in the short-term, however.

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