Banks Use Principal-guaranteed Structured Deposits As Replacements for WMP’s


Chinese banks continue to make increasing use of structured deposits as a means of shoring up funding sources, following the launch of new asset management regulations that have undermined the viability of wealth management products (WMP’s).

China launched a new set of landmark asset regulations in April that specifically target the “implicit guarantees” undergirding financial vehicles such as WMP’s, which have long been a staple of the Chinese shadow banking sector.

The new regulations forbid Chinese banks from selling principal-guaranteed WMP’s to clients, depriving smaller lenders in particular of a key channel for accessing funds.

Bankers have proven tireless in their search for opportunities to engage in “regulatory arbitrage,” however, with recent reports indicating that many Chinese lenders are already turning to other products such as structured deposits and large-denomination certificate of deposit as replacements for WMP’s.

A new report from the state-owned Economic information Daily indicates that there has been little relent in the increasing use of structured deposits as a new mainstay funding source.

According to the report banks in multiple regions including Shanghai, Jiangsu and Guangdong are actively promoting a new form of “structured principal-guaranteed product” as a replacement for principal-guaranteed WMP’s.

Depositors said that they have received multiple offers from banks for structured deposits that enjoy guaranteed principals.

One branch of China CITIC Bank in the Xuhui district of Shanghai has used terms in its advertising copy such as “Principal Protected! 4.55% or 5.55%,” for structured products that are partially pegged to the forex market.

The promotion of structured products has been especially strong in smaller urban centres where retail investors are more risk averse, while official data points to a steady rise in the volume of structured deposits since the start of the year.

In the first quarter of 2018 alone new structured deposits in the Chinese banking sector hit 1.84 trillion yuan, already far ahead of the figure for 2017 as a whole.

New structured deposits of small and medium-sized banks were over 1 trillion yuan in the first quarter, while the big four state-owned banks saw new structured deposits of 556.4 billion yuan across the same period, as compared to under 200 billion yuan for all of last year.

In addition to the weakening of WMP’s by the new asset regulations, industry insiders say the explosive growth of structured deposits is significant of a “deposits drought” amongst Chinese banks, primarily due to an excessive spread between money market rates and the enforced statutory deposit rate, leading to disappointing growth in the low-cost deposits of lenders.

Li Qilin (李奇霖) from Lianxun Securities said that fixed-term bank deposits have entered a period of contraction, while demand deposits are seeing their share of growth decline.

In sharp contrast structured deposits are currently the most rapidly growing entry on the liabilities side of bank balance sheets, emerging as a major new source of debt.

Structured deposits also possess key advantages compared to WMP’s, including no need to conduct risk assessments and no restriction on amounts.

Analysts point out, however, that structured deposits offering guaranteed principals are in fact “counterfeit” in nature, as they are not actually tied to the performance of other indices, with banks themselves are responsible for underwriting their payments.

“In actuality it’s the banks who are digging into their pockets to provide the flour and oil to create these financial derivatives and attract customers,” said one analyst.

As a consequence Chinese regulators are expected to clamp down on their usage in the near-term, with observers calling for the establishment of a comprehensive reporting and statistical system and the strengthening of product sales supervision, in order to ensure that issuing entities fully disclose information and risk in relation to structured products

“This year structured products have seen roaring growth,” said Liu Yinping (刘银平), a banking sector analyst with Rong360. “We propose that regulators give them greater attention. Investors must also change their attitude towards wealth management, and raise their own awareness of the need for risk prevention.”

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