Interest Reforms Could See Jumbo CD’s Replace Wealth Management Products


Analyst says large-denomination certificates of deposit could replace wealth management products as the vehicle of choice for banks to obtain funds following the launch new asset management regulations by Beijing alongside efforts to step up interest rate marketisation reforms.

At the 2018 Boao Forum for Asia Chinese central bank governor Yi Gang flagged further reform of China’s interest rate system, including the removal of the informal ceiling which continues to restrict deposit rate increases against the benchmark rate to under 50%, even following the cancellation of official constraints in 2015.

The move has already triggered shifts in the Chinese banking sector, with large-denomination CD’s seeing a marked increase in rates across the board. Some small and medium-sized lenders are providing a premium of up to 50% against the benchmark for one-year large denomination CD’s , as compared to 40% previously.

Analysts say that interest rate liberalisation in tandem with the launch of new asset management rules could result in the replacement of wealth management products by jumbo CD’s as the fund-raising channel of choice for Chinese banks.

New asset management regulations first unveiled in November could seriously undermine the viability of the wealth management products used by some  banks to raise funds in lieu of retail deposits, by targeting the “implicit guarantees” that undergird them.

Zhang Ming (张明), banking sector analyst with Hua Chuang Securities, said to 21st Century Business Herald that he expects wealth management products to continue to shrink this year as a result of regulatory pressure, with large-denomination CD’s most likely picking up the slack.

Zhang said that amidst a sharp tightening of funds following strict regulation of the finance sector, and expectations of further marketisation reform of interest rates, bank jumbo CD’s have suddenly emerged as the “parvenus” of Chinese financial markets.

“Particularly if a secondary market in large-denomination CD’s can be established in future, large-denomination CD’s will see large-scale development.

“Regulators are also willing to open up, and enable banks to use this method to reduce their off-balance sheet needs.”

Since the crackdown on shadow banking and the banking sector launched in 2017, financial regulation in China has seen a continual tightening, particularly for both on and off-balance sheet non-standard assets, leading to a sharp increase in pressure on lenders.

Smaller banks are bearing the brunt of it, left in a  far more precarious state than their larger peers who are better positioned to weather adverse conditions.

A research report from Haitong Securities indicates that as of the end of 2017 Chinese banks have seen a total increase in their risk-weighted assets of 8.7 trillion yuan, with 54 out of 123 banks monitored facing pressure with respect to their capital adequacy ratios.

One executive from a big state-owned bank said that while the impetus to issue jumbo CD’s is strong, costs remain considerable.

“Our bank engaged in a trial period last year, lifting rates to 42% above benchmark. Subsequently the head office cancelled the trial based on the comparatively high cost of operations, and this year we will launch them again.”