Structured deposits at Chinese commercial banks have fallen below the 10 trillion yuan threshold for the first time in 2020 as regulators crack down on use of the products by smaller lenders to tap retail funds.
Commercial bank structured deposits stood at approximately 9.42 trillion yuan as of the end of August according to the latest data from the Chinese central bank, for a decline of 752.393 billion yuan, or 7%, that month, and a 2.72 trillion yuan decline compared to 2020’s peak value of 12.14 trillion yuan.
The low reading arrives following reports that Chinese banks have been subject to window guidance from regulators since June, pressuring them to reduce the scale of outstanding structured deposits to less than the volume at the start of the year by the end of September, and less than two thirds this amount before the end of the year.
Zhang Licong (章立聪), fixed income analyst with CITIC Securities, said that some of these structured deposits had already shifted to publicly offered mutual funds, or been directly invested in the Chinese stock market.
The shrinkage in structured deposits has been accompanied by ongoing declines in their average expected maximum yields, which fell by 140 basis points compared to their 2020 peak value to 3.65% at the end of August.
Structured deposits are deposits combined with derivatives products whose performance can be tied to a variety of indicators, including interest rates and exchange rates.
Regulators have expressed increasing concern that Chinese banks are making use of “fake” structured deposits that offer high, stable returns in order to attract more funds from retail customers, after the launch of asset management rules at the start of 2018 undermined the guaranteed returns on wealth management products (WMP’s).
During the first four months of 2020 structured deposits saw continuous growth to breach the 12 trillion yuan threshold in April. Small and medium-sized lenders were a core driver of this growth, with their structured deposit balance reaching 7.91 trillion yuan as of the end of April for a 1.72 trillion yuan rise since the end of 2019.
Reports also emerged that some borrowers were using structured deposits to engage in interest rate arbitrage in the first half of 2020, as Beijing stepped up liquidity to spur economic activity during the COVID-19 pandemic, serving as further incentive for regulators to crackdown on the products.
Strict controls on structured deposits have put increasing pressure on the liabilities side of bank balance sheets and created attendant liquidity pressure, prompting the Chinese central bank to make greater injections via medium-term lending facility (MLF) and reverse repo operations on the open market.
Analysts expect this liabilities side pressure to continue in the fourth quarter, especially for small and medium-sized banks, creating ongoing liquidity issues.
Should banks satisfy the target of a 1/3 third reduction in structured deposits in 2020 compared to their value at the start of the year, this will result in a decline in the structured deposit balance to around 6.4 trillion yuan, for fall of 3.02 trillion yuan compared to the end-of-August figure.
Issuance of government bonds and the slow pace of fiscal expenditures are also expected to put further pressure on liquidity in the Chinese banking system in the fourth quarter.
In addition to open market operations, Zhang Licong said that there was a strong likelihood that the Chinese central bank would make more use of targeted reserve ratio cuts before the end of 2020.
Zhang points out that MLF cannot be used in a “targeted” way, while their effectiveness will see marginal reductions are total liquidity stabilises, and could even create fresh arbitrage opportunities.
“Structured, targeted reserve ratio reductions will be more effective, and can better furnish small and medium-sized banks with capital,” said Zhang.
