Poorly Paid Chinese Savers Skirt Deposits for Structured Notes

PBOC Governor Zhou Xiaochuan
Zhou Xiaochuan, governor of the People's Bank of China, said in March that deposit rates will be liberalized in one to two years. Photographer: Tomohiro Ohsumi/Bloomberg

Chinese investors looking for a better return than what they’re getting on bank deposits have boosted structured product offerings in the nation to the most in more than 18 months.

The number of structured offerings, which in China are sold under the banner of wealth- and asset-management products, offered by banks jumped to 253 in July, the most since December 2012, according to research firm Cnbenefit. Savers diverted 1.6 trillion yuan ($260 billion) of deposits into asset-management products last month, sending local-currency bank holdings down by a record amount, central bank data back to 2000 show.

As Chinese search for new ways to earn a better return on their savings when the nation’s central bank is capping deposit rates to provide companies with cheap loans for investment, the number of structured products banks offer is forecast to increase. Wealth-management products yield an annualized average 5.2 percent versus 3 percent for one-year deposits, according to data on the China Banking Wealth Management Registration System’s website.

“In the second half, we expect more banks to break free from the culture of guaranteed-payment products” and introduce products that compensate investors for taking risk, Fang Rui, a researcher at Chengdu-based Cnbenefit, said via e-mail Aug. 18. Structured notes will benefit because they’re “substitutes for these implicitly guaranteed products.”

Shadow Banking

The surge in issuance in July came after banks cut structured product offerings the previous month as regulators implemented measures to curb the shadow-banking industry. China’s wealth-management balance rose 24 percent in the first half to 12.7 trillion yuan, underlining the difficulty the government faces in clamping down on unofficial lending, according to Francis Chan, a finance analyst for Asia at Bloomberg Intelligence.

The diversion of money from deposits and into wealth-management products has been going on for several years, according to Liu Li-Gang, Australia & New Zealand Banking Group Ltd.’s Hong Kong-based chief Greater China economist. The ceiling on deposit rates in China is the “main driver,” he said in an e-mail Aug. 18.

People’s Bank of China Governor Zhou Xiaochuan said in March that deposit rates will be liberalized in one to two years. In a Bloomberg News poll of economists last year, a majority predicted policy makers would remove all restrictions on deposit rates in 2016 or later.

“The trend of savers moving into wealth-management products is still very much in play,” said Stephen Green, the head of Greater China research at Standard Chartered Plc. “The over 200 basis points of extra yield is attractive.”

Only one in every about 2,130 wealth-management products redeemed in the first six months of this year incurred losses, paying an average 90.6 percent of principal back to investors, China Banking Wealth Management Registration System data show. They were all structured products or wealth-management offerings invested overseas on behalf of Chinese clients.

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