Banks Desperate for Capital Dangle High-Yield Products in Front of Investors

(Beijing) – As China’s central bank quarterly check on capital adequacy approaches, some banks are seen scrambling for short-term funds by offering attractive yields to lure more investors to their wealth management products (WMPs).

Banks can no longer fully meet their funding needs through the interbank market, as liquidity there is drying up, due to Beijing’s continuous efforts to rein in credit growth within the financial system. To fill the funding gap, some banks are increasingly relying on selling WMPs to raise funds from investors who are hungry for yields.

WMPs are seen as one of the culprits of China’s ballooning debt and credit growth. When banks offer attractive yields on WMPs, they are compelled to invest in high-yield – and therefore high-risk – assets to match their pledge to investors. Therefore, doing this likely introduces more risks into the banking system, analysts said.

Annualized yields on some short-term WMPs have increased to 5% or more recently. In the week ended June 2, the average yield on WMPs was 4.43%, based on 188 banks compiled by PY Standard, a Chinese financial research firm that tracks the wealth management sector. The average yield has risen 32 basis points since the start of this year.

For instance, China Merchants Bank Co. Ltd., the country’s seventh largest bank by assets, is now offering a 5% yield on 91- and 105-day WMPs that do not have guaranteed returns. China Everbright Bank Co. Ltd. is also selling a 138-day WMP at an annualized yield of 5%.

The scramble for funds comes as the People’s Bank of China is about to launch another macro-prudential assessments (MPA) that aims at ensuring banks have adequate capital. The upcoming quarterly assessment will be conducted by the end of June.

The central bank has been squeezing interbank liquidity through reducing the issuance of negotiable certificates of deposit (NCDs). Banks borrow money from each other in the interbank market through transacting NCDs.

Fewer NCDs drive up interest rates in the interbank market, forcing some banks to turn to cheaper options for funding. The interest rate on one-year NCDs issued by AA+ rated banks stood at 5.05% Monday, up from 4.82% a quarter ago.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)