China’s Structured Product Offerings Drop on Shadow Bank Curbs

Chinese structured product offerings dropped by the most in six months in June after the government put in place measures to curb the shadow-banking industry, restricting issuers’ ability to sell the investments.

The number of securities fell 14 percent to 197, compared with average growth of 8.4 percent in the first five months, according to Cnbenefit, a consulting firm that focuses on wealth management. The company collected the data from publicly available information and also through agreements with some banks.

Premier Li Keqiang has sought to stem expansion of trust companies, wealth management products and other forms of shadow banking, which Barclays Plc estimates was worth 38.8 trillion yuan ($6.3 trillion) as of the end of last year. The central bank introduced steps in May that included ordering lenders to curb interbank borrowing. The banking regulatory tightened regulation of new trust products in April.

“The Chinese central bank’s move to curb interbank borrowing may dry up liquidity and affect funding for wealth management products,” said Francis Chan, who follows the financial sector in Asia for Bloomberg Industries. “Together with a clampdown on trust-related wealth management products, that may have caused sales of structured products to fall.”

Wealth Products

The data from Cnbenefit, based in the southwest Chinese city of Chengdu, include structured notes offered through the qualified domestic individual investor program, which allows Chinese investors to buy certain overseas securities. They also cover structured deposits and other wealth-management products that combine a fixed-income security with derivatives, Cnbenefit said.

The People’s Bank of China’s measures in May closed off routes for banks to offer wealth products with attractive yields, according to Xiaoning Meng, a portfolio manager at CSOP Asset Management Ltd.

“For banks to offer higher yields than deposit rates on the products, they have to go through non-loan channels,” Hong Kong-based Meng said. “The central-bank move sealed off a lot of these channels and now, banks won’t have a method to support the higher yields of the structured products.”

Appetite Falls

DBS Group Holdings Ltd., Southeast Asia’s biggest bank, offers a structured investment product in China that is linked to the three-month London interbank offered rate and pays an annualized return of between 2.5 percent to 6.1 percent, according to its website.

Chinese banks’ outstanding wealth management products rose 44 percent on the year to reach 10.2 trillion yuan by the end of 2013, according to a statement posted to the China Banking Association’s website dated June 23. There are 280,000 private banking clients with assets under management reaching 3.66 trillion yuan, the statement said.

Speculation has mounted that failures could spread among China’s trust and wealth management securities after the eleventh-hour rescue in January of a 3 billion-yuan product arranged by China Credit Trust Co. In March, Jilin Province Trust Co. missed payments on a 973-million-yuan product as Shanxi Liansheng Energy Co., the borrower drawing on the trust’s funds, underwent a local government-led plan to restore profitability.

“Defaults of some trust products have increased the perception of risk and reduced market appetite,” Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB, said in an e-mail on July 8.

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