Chinese Regulators Crack Down on Use of Smart Deposits to Offer Covert High Interest


Chinese banks have commenced the withdrawal of their smart deposit offerings following efforts by financial regulators to crack down on use of the products to covertly provide higher interest rates.

According to domestic media reports Chinese regulators convened a meeting at the start of May calling for financial institutions to clean up their usage of innovative depository products, in order to prevent them from circumventing interest rate restrictions to better attract retail funds.

The China Banking and Insurance Regulatory Commission (CBIRC) subsequently issued CBIRC Directive no. 23 on 17 May, clearly requiring the rectification of “structured deposits which are inauthentic, and the use of ‘fake structured deposits’ to covertly attract customers with high interest rates.”

A report from Securities Daily indicates that the measures have already proved effective, with all of the big state-owned banks except for China Construction Bank (CCB) suspending their sale of smart deposit products, and the majority of all Chinese banks actively withdrawing them as offerings.

“Sale of smart deposit products was suspended on 17 May, and outstanding products will be naturally terminated once they mature,” said one employee from a state-owned bank.

Some private banks have suspended the sale of smart deposit products, yet others are continuing to offer them, yet contracting operations via price reductions and volume restrictions.

Wang Lijuan (王丽娟), a researcher from the strategic growth department of Evergrowing Bank, said that private banks in China are often compelled to use higher interest rates as well as other alternative means to attract deposits, given that their branch networks are smaller and their brand influence weaker.

“For private banks, they can on the one hand step up cooperation with external internet enterprises to expand their client sources, and on the other hand establish their own unique services to attract and further solidify clients in order to obtain stable deposits.”

Smart deposits in China usually consist of two types – the first being those that offer graded interest rates based on daily average scale, which are primarily provided by established, traditional lenders, and the second being those that offer graded interest rates based on deposit time, which are primarily offered by smaller private banks.

One example of the later is a smart deposit product provided by a private Chinese lender that offers an interest rate of 3.8% for deposits of more than seven days and less than six months; 4% for deposits of more than six months and less than one year, 4.2% for deposits of more than one year and less than two years, 4.5% for more than two years and less than three years, 4.6% for three to five years, and 4.7% for five years or more.