China’s $2.36 Trillion “Advance Withdrawal” Fixed-term Deposit Market Squeezed out Completely

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China has seen the complete removal of fixed-term deposit products that permit advance withdrawals with variable interest rates, following the launch of a crackdown on the instruments by Chinese regulators in late 2019.

The People’s Bank of China (PBOC) said that as of the end of 2020 the balance of outstanding “graded interest rate” (靠档计息) fixed-term deposits in China had fallen to zero, after previously breaching a high of 15.4 trillion yuan (approx. USD$2.36 trillion).

Graded interest deposit products are fixed-term deposits that permit withdrawal in advance, and provide different interest rates depending upon the time of withdrawal. 

These interest rates are calculated on the basis the number of days that funds are stowed with the deposit product. For example, customers can withdraw funds from a one-year certificate of deposit (CD) five months in advance, in order to obtain the fixed-term interest for a six month period, plus one month of interest at a separate rate. 

The products proved to be highly popular with Chinese customers given that they combined the flexibility of demand deposits with the higher returns of fixed-term deposits. Customers that used the products were highly sensitive to interest rate shifts, however, creating the problem of large-scale withdrawals for banks whenever interest rates posted downward adjustments.

PBOC first began to crack down on the products in 2019, prompting many Chinese financial institutions to withdraw them from sale.

In March 2020 PBOC announced that graded interest deposit products would in future be deemed as “non-compliant,” while also introducing stricter provisions for the management of interest rates offered by banks.

By 1 January 2021 all six of China’s big state-owned banks in China had suspended the sale of graded interest deposit products in response to the PBOC directive.

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