Chinese state media points to the possibility that financial regulators could target other investment products provided by banks such structured deposits, following the launch of new asset management regulations that have undermined the viability of wealth management products (WMPs).
On 27 April Beijing officially launched the “Guidance Opinions Concerning Standardisation of Asset Management Operations by Financial Institutions” (关于规范金融机构资产管理业务的指导意见), which analysts expected to cause a major shake-up of China’s financial sector by banning the implicit guarantees undergirding financial product such as WMP’s.
WMP’s are considered a core part of China’s shadow banking sector, providing smaller lenders that lack the extensive deposit base of the bigger banks with a means of accessing funds by dodging curbs on deposit rates.
The introduction of the new asset management regulations has already caused bank WMP’s to take a hit. Data from Rong360 points to the issuance of 10,849 WMP’s in April, for an on-month decline of 2783 products, or a drop of 20.42%, as well as a year-on-year decline of 817 products.
Many banks have reportedly already suspended the sale of WMP’s with guaranteed principals, as well as shifted to other products such as structured deposits and certificates of deposit, which can be used to offer higher returns yet are still considered to enjoy implicit guarantees.
The Guangzhou Daily now reports that some banks are using “fake structured” deposits to “canvas depositors with high rates,” while rumours have also recently spread that local regulators want their sale to be suspended.
According to the report some banks are recommending structured deposit products when clients make inquiries about wealth management products that enjoy guaranteed principals.
Since the start of the year structured deposits have seen massively accelerated growth in China. The latest data from the People’s Bank of China indicates that as of the end of March the structured deposits of Chinese national banks had reached 8.8 trillion yuan, for an increase of 1.84 trillion yuan in the first quarter., as compared to a full year increase of just 1.8 trillion yuan in 2017.
Structured deposits are part of the on-balance sheet operations of Chinese banks, and divided into guaranteed principal and non-guaranteed principal products. Interest rates for the products are usually between 4 to 4.7%, while according to the Guangzhou Daily most structured deposits in China are guaranteed principal in nature.
Industry sources say that a key factor behind the explosive growth in structured deposits this year has been “operation in breach of regulations,” chief amongst them the use of “fake structured deposits” that are only structured deposits in name, but fixed-income products in reality.
“This goes against the nature of a structured deposit, and is categorised as a form of hidden, illicit arbitrage,” said one source.
Analysts from China Merchant Securities point out that the high real returns offered by structured deposits are not due to the strength of the derivatives products of banks, but instead the result of the conditions for high returns on the products that are bound to be triggered.
For this reason the use of structured deposits to replace WMP’s is unlikely to serve as an effective short-term measure for relieving the high cost pressure on banks.
One analyst from PY Standard said that financial regulators are already cutting back or even suspending applications from regional banks for structured deposit qualifications.
In future, those banks that are qualified to engaging in derivatives transactions will likely expand their issuance of structured deposits, while some smaller lenders will come under greater cost pressure.