Structured Deposits Wax as Wealth Management Products Wane

Goodbye wealth management products. Hello structured deposits.

Over the last few months, China’s commercial lenders have been selling more structured deposits — savings accounts coupled with an investment component — as an alternative to wealth management products, as the latter have come under greater government scrutiny.

As of the end of January, the outstanding amount of structured deposits issued by commercial lenders surged 38% year-on-year to 7.98 trillion yuan ($1.25 trillion), according to central bank data.

Of that total, the outstanding structured deposits of large lenders, including the big five lenders, the Postal Savings Bank of China and the China Development Bank, rose by 27% year-on-year to 2.8 trillion yuan, according to the central bank data. The outstanding structured deposits of small to midsize commercial lenders jumped 44% to 5.2 trillion yuan over the same period.

Structured deposits offer investors a greater return than standard savings accounts because they include returns from one or multiple investments linked to stocks, commodities, exchange rates or market indexes. However, the higher returns come with larger risks as investors have to bear the losses if the underlying investments drop in value. That’s why they haven’t been broadly sold among mom-and-pop investors, who tend to prefer investments with an implicit guarantee.

In November, China’s top financial regulator released a draft of the first overarching rules for the $15 trillion asset-management industry. According to the draft rules, all asset management products — including wealth management products — will soon be subject to requirements on leverage ratios, risk reserve funds and investment restrictions, while institutions will no longer be able to offer an implicit guarantee on returns.

Caixin reported earlier this year that the rules were going through the final amendment process and could be implemented before the country’s annual legislative session ends on Thursday.

After pushing back against the draft for months without the regulators budging, banks are now moving forward to implement the new requirements. Chinese financial institutions’ registration of the issuance of new asset management products plunged in January. The total value of the newly registered products fell 55.5% from the previous month to 124.2 billion yuan, according to industry portal stcn.com.

Market participants believe the drastic regulatory change is pushing commercial banks to search for alternatives to wealth management products, which once boasted white-hot popularity. At present, the answer seems to be the structured deposits.

However, banks would come under liquidity pressure if structured deposits replace all of their wealth management products, according to fixed-income analysts from Huachuang Securities Co. Ltd. This is because banks have to set aside cash in reserve for all the structured deposits they issue.

Contact reporter Leng Cheng (chengleng@caixin.com)