A rapid expansion in structured deposits to record high levels has caused concern amongst Chinese regulators over the potential for companies to engage in arbitrage by taking advantage of low post-COVID-19 interest rates.
Data from the Chinese central bank indicates that as of the end of the first quarter the structured deposit balance of commercial banks was 11.67 trillion yuan, for an increase of 2.07 trillion yuan compared to the end of last year.
According to some analysts the surge in structured deposits to a record high level is the result of both the impacts of the COVID-19 pandemic as well as end of quarter assessments for banks.
Others have raised concerns about the possibility for arbitrage however, given that Chinese regulators have driven lending rates to low levels in the wake of COVID-19.
This has created significant room for interest rate arbitrage, with an expanding spread between the return on structured deposits and wealth management products as compared to the rates for products such as short-term loans and bills.
The Shenzhen bourse recently issued a warning to Yealink (亿联网络) (300628.SZ) over concerns that was it using bank loans and wealth management products (WMP) to engage in interest rate arbitrage.
In its response letter issued on 22 April, Yealink stated frankly that in 2019 the company’s average wealth management product (WMP) returns were over 4.2%, but that since August 2019 until the present the average cost of new borrowing has been 3.2%, for a one percentage point spread.
Yealink had applied with banks for credit of up to 800 million yuan, despite having 3.49 billion yuan in WMP’s on its books alongside 106 million yuan in cash.