A scramble to retain customers pulling their money from traditional deposit accounts is causing Chinese banks to use a growing number of alternatives that regulators fear could undermine the financial underpinnings of the economy.
China places a ceiling on deposit rates as a way of limiting competition among banks and to fortify the capital positions of institutions that had effectively been insolvent a decade ago. But with inflation nearly 3 percentage points above the rate ceiling many depositors are hungry for better returns, forcing banks to come up with new ways to retain deposits.
Their main technique has been the issuance of wealth management products, which typically are loans repackaged as short-term investment vehicles and are held off balance sheet. Annualised rates can be as high as 8 per cent, more than double the one-year deposit rate.
Beijing has been trying to rein in the explosive growth of these products. In August, the China Banking Regulatory Commission (CBRC) ordered that banks apply reserve requirements to their margin deposits, a move which in effect made the issuance of wealth management products more costly.
Last week, the CBRC warned that the burgeoning business had “exposed problems and weaknesses” in the banking sector and stepped up its crackdown with an 80-point directive.
It told banks that wealth products could not be used as a backdoor technique for raising interest rates or for attracting new deposits. It also admonished banks to be more forthcoming in disclosing risks to investors and banned them from marketing such products on TV or in conjunction with gift offers.
Raymond Yung, PwC financial services leader for China, said the regulatory drive was understandable.
“No matter how much legal wording you put into the documentation, if at the end of the day an old customer comes to the bank and says ‘I lost money as a result of investing in these structured products, I want you, the bank, to pay me back because I trusted you’, then it’s a matter of reputation and fiduciary capacity,” he said. “I personally feel that the banks would be on the hook.”
The latest regulatory orders will not go into effect until the start of next year. In the meantime, the growth of wealth management products has continued more or less unchecked. According to official data, bank deposits increased a hefty RMB730 billion ($114 billion) in September, a sign that on the surface all is well. But analysts said that number was misleading, because banks had probably sugar-coated their books with end-of-quarter deals to attract deposits temporarily.
Analysts say banks manipulate the deposit data by offering short-term wealth management products that allow them to bring deposits back on to their books for a few days at the end of each month when official data are compiled. Official media have also reported in recent weeks that the nation's biggest banks had seen a net outflow of traditional deposits in the first half of September.
A more accurate reflection of the importance of wealth management products was found in the monetary growth data released by the central bank on Friday. The broad M2 measure of money growth, which includes deposits but not wealth products, was nearly 1 percentage point below forecasts.
“M2 should have increased more, considering the increase in the monetary base and the multiplying effect. We suspect depositors continue to switch to wealth management products and that slowed the growth of traditional deposits,” said Citi economist Shuang Ding.
Industrial and Commercial Bank of China, the world’s biggest lender by market value, previously disclosed that it sold nearly RMB2,780 billion of wealth management products in the first half, more than triple the RMB902 billion in new deposits it attracted over the same time.
Some analysts have welcomed the surge in wealth products, saying that it is forcing banks to become more market-driven in their approach to customers. But a senior regulator told the Financial Times that any time there was such fast growth of new products, it was necessary to be vigilant to risks.