Chinese Banks Told to Reduce Structured Deposits by One Third Before End of 2020 Due to Interest Arbitrage Fears

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Chinese banks say they have been instructed by regulators to dramatically reduce the scale of their structured deposit balance before the end of the year, with analysts highlighting concerns over arbitrage-driven growth.

Sources from multiple banks have told National Business Daily that they received window guidance requiring that they reduce the scale of their structured deposits to two-thirds the levels they were at the start of the year.

Structured deposits have seen rapid growth in 2020, breaking through the 12 trillion yuan threshold at the end of April to tap a historic high, with enterprise structured deposits posting especially rapid growth.

Average returns on structured deposits have also continually ridden high against a backdrop of loose monetary policy in the wake of the COVID-19 pandemic, creating strong concern about the possibility of interest rate arbitrage.

Data from Rong360 indicates that average returns for structured deposits have risen from 4% at the start of 2020 to around 5% as of mid-April, increasing the liability costs for banks was well as creating room for arbitrage opportunities.

Ming Ming (明明), bond researcher at CITIC Securities, said that interest rates for loans, bonds, bills and other enterprise debt instruments had all seen marked declines in an environment of ample liquidity.

The price gap between bills and bonds and structured deposits continues to increase, and to a very large extent is driving the growth in structured deposits.

Arbitragers can use loans, bills, bonds and other form fo financing to invest in structured deposits and earn off the interest spread.

Structured deposits first saw a surge in popularity in China following the launch of new asset management regulations at the start of 2018, which removed the “implicit guarantees” on the wealth management products (WMP) generally used by smaller banks to provide high rates of return to retail clients.

The structured deposit balance of Chinese commercial banks has since more than doubled in a three year period, from under 6 trillion yuan as the start of 2017 to 12.14 trillion yuan as of the end of April 2020.

Regulators expressed concern earlier on that Chinese banks were using structured deposits improperly as a covert means of providing higher returns to clients.

This con­cern prompted the China Bank­ing and In­sur­ance Reg­u­la­tory Com­mis­sion (CBIRC) to is­sue the “No­ti­fi­ca­tion Con­cern­ing the Un­der­tak­ing of Work to ‘Con­sol­i­date the Re­sults of Com­bat­ing Malfea­sance and Ex­pe­dite the De­vel­op­ment of Com­pli­ance’” (关于开展“巩固治乱象成果促进合规建设”工作的通知) in May 2019.

The no­ti­fi­ca­tion marked the first time that CBIRC called for the in­spec­tion of the struc­tured de­posits of banks, to de­ter­mine if they were “fake struc­tured de­posits” be­ing used to pro­vide higher re­turns. 

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