Smaller Chinese banks are resorting to the use of online channels to attract funds from retail investors by promising higher rates of return than those permitted by regulators.
Advertisements circulated at the start of the week by Chinese wealth management app Dainiter.com promise to connect investors to rural and urban commercial banks that can provide annualised returns of as high as 14% via standard deposit products.
The deposit products come attached with such exorbitant returns by providing cash payback rewards in addition to interest income.
At present the provision of interest rates by Chinese financial institutions that are more than 55% above the one-year benchmark deposit rate of 1.5% is prohibited.
According to a report from the South China Morning Post Chinese banks offering higher returns via cash rewards include Henan Yichuan Rural Commercial Bank, Bank of Jinzhou, Bank of Guizhou, Bank of Zhengzhou and Shenyang Rural Commercial Bank.
Smaller banks in China are in the midst of a liquidity crunch, with regulators forced to intervene in the fortunes of Inner Mongolia’s Baoshang Bank in May, followed by Bank of Jinzhou in July and Hengfang Bank earlier this month.
Sun Wujun, finance professor with Nanjing University, said to SCMP that tighter liquidity conditions are compelling smaller banks to resort to these measures to grab access to funds.
“I would not be surprised if some small banks are using this way to obtain short-term liquidity,” Sun said.
“Rural and urban commercial banks are facing a pile up of bad debts. Meanwhile, institutional investors are shying away from small banks since the takeover of Baoshang, making their finance conditions even more difficult.”