Chinese Banks Compete Against Wealth Management Products Using Gifts

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A surge in the returns offered for short-term wealth management products has compelled some banks to compete for the funds of clients by providing gifts to depositors.

China Merchants Bank launched its Jinkuihua wealth management plan at the start of June with maturities of 91 and 105 days, and providing yields of 5% on average.

The impressive returns provided by China Merchant Bank’s latest offering of wealth management products has prompted the bank to warn customers that they need to make bookings in advance for the instruments.

Wealth management products are a much discussed and controversial feature of the Chinese financial system, and as the largest part of the shadow banking sector they are viewed by many observers as a major source of systemic risk.

The financial instruments are highly popular with customers because they provide far higher rates of return than standard bank deposits, while banks favour their ability to shift assets off balance sheets and channel funds to areas that are off limits for conventional deposits.

Other major banks are following CMB’s lead in providing rates of return on WMP’s that are even higher than they have been in the recent toast. Caixin reports that the Bank of China, China Construction Bank and the Industrial and Commercial Bank of China will all be providing short-term WMP’s with fields around the 4.5 – 4.6% threshold.

Industry observers say that the sharp rise in WMP yields is the result of the heavy crackdown imposed on the lending sector by Chinese authorities led by the China Banking Regulatory Commission which has led to a “funds drought” and surge in capital costs.

The Chinese central bank’s macro prudential assessments have put a squeeze on interbank assets and debt that keep capital spinning within the financial system and raise the cost of borrowing for the real economy.

The deleveraging push led by PBOC and CBRC has caused interbank capital costs to rise sharply, pushing up rates elsewhere.

While lenders may favour the use of WMP’s to access funds that fall beyond the remit of conventional banking regulations, they still need deposits in order to satisfy the requirements of regulators who have intensified their scrutiny of the sector since the start of the year.

As a consequence some banks are turning to desperate expedients to obtain deposit funds, with one inside source telling Caixin that branches are offering complementary gifts with fixed term deposits of 5000 yuan.

 

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