Structured Deposit Balance Rises to Record High, Triggers Concern over Interest Rate Arbitrage

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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. 

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Shen­zhen Bourse Is­sues Warn­ing over In­ter­est Rate Ar­bi­trage as Cost of Bor­row­ing Dri­ven Lower

Re­turns on Struc­tured De­posits Drop to 4.21% as Chi­na’s Bank­ing Reg­u­la­tor Tar­gets Bills Ar­bi­trage

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