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It’s a buyer’s market as Chinese banks scramble for cash, offer 7 pc yields on wealth management products

In a scramble to raise cash ahead of a review by the PBOC, banks are offering attractive yields on wealth management products through the end of June

PUBLISHED : Monday, 12 June, 2017, 6:19pm
UPDATED : Monday, 12 June, 2017, 11:13pm

Wealth management products, a main part of China’s shadow banking business, are suddenly hot again.

The annual investment yield even exceeds 7 per cent at some big state-owned lenders, as they scramble to entice savers and hoard cash ahead of a crucial inspection by the central bank.

But analysts say the yields, along with bank deposit rates, may reach their peak by the end of June, as the central bank is set to wrap up its review by month-end, after which the cash squeeze may ease. Tightened financial regulations may also limit banks’ issuance of riskier investment products for the rest of the year.

Wealth management products (WMP) are a popular savings tool in China, offering higher yields than deposits. But unlike bank deposits, they are uninsured and banks are usually not responsible if the products fail.

The yield rates for WMPs have spiked in the past few months. In May, the average annualised yield issued by Chinese banks increased to 4.24 per cent, up for a sixth straight month, according to data from Chinese financial information site rong360.com.

As liquidity is highly strained, banks are fighting for savers’ cash by raising yields on WMPs, deposit rates, as well as interest rates on certificates of deposit
Liu Qihao, an analyst for Shanghai Securities

Some lenders even promised an annualised return of more than 7 per cent. For example, a WMP derivative linked to the large-cap CSI300 Index on the Shanghai Stock Exchange, issued by Bank of Communications on June 1, offered a 7.15 per cent annualised return.

Deposit rates also jumped at some smaller banks, which are competing with bigger rivals to entice depositors. Bank of Jinzhou, a lender based in the northeastern city of Jinzhou, has increased its five-year fixed term deposit rate to 4.8 per cent, which is 74 per cent higher than the PBOC’s five-year benchmark deposit rate of 2.75 per cent.

Even Yu’E Bao, a money market fund owned by Alibaba’s Ant Financial affiliate, has increased its annualised return to 4.097 per cent, the highest in a year. Its yield touched a low of 2.3 per cent last September, before slowly bouncing back.

“As liquidity is highly strained, banks are fighting for savers’ cash by raising yields on WMPs, deposit rates, as well as interest rates on certificates of deposit,” said Liu Qihao, an analyst for Shanghai Securities.

Liquidity conditions have remained tight since earlier this year, after Chinese authorities launched a crackdown to reduce leverage in the financial system and tightened their supervision of banks’ off-balance-sheet business.

In particular, heading into June, liquidity is further strained, as banks prepare for the PBOC’s Macro Prudential Assessment (MPA) at the end of the month.

The MPA, first launched in 2016, is a quarterly inspection by the central bank to monitor banks’ asset quality, capital adequacy, liquidity conditions, and the stability of their funding.

“Banks want their balance sheets to look healthier ahead of the assessment,” Liu said.

Wang Sheng, an analyst for Shenwan Hongyuan Securities, said this year’s MPA is more rigorous, as the PBOC will also look at banks’ off-balance sheet assets to gauge the potential risks.

“Regulators have tightened the screws on financial leverage,” Wang said.

“Smaller banks are under even bigger pressure, as they are usually more leveraged and less liquid,” he said. “Thus they have rushed to hoard more cash by raising the yield on WMPs and deposit rates.”

Expectations of a US interest rate increase later this week have also added to the squeeze in the financial system.

“The US Federal Reserve is widely expected to raise interest rates at its meeting on June 13 to June 14, ”

said Yin Yue, an analyst for Lianxun Securities.

The highly-anticipated increase could widen the interest rate differential between the US and China and exacerbate capital outflows from China.

“I expect the cost of borrowed money, or the interest rate in the money market, to rise further in the remainder of June,” he said.

Still, some analysts predicted the WMP yields will peak in June, as liquidity conditions are set to ease after the MPA ends.

“I don’t expect cash conditions to tighten further after June,” said Wang for Shenwan Hongyuan Securities.

“The PBOC has set the tone for its monetary policy as to keep liquidity ‘relatively stable’. We can infer that the authority will try to manage expectations properly and maintain stability.”

Wang Sheng, an analyst for Shenwan Hongyuan Securities, said tightened financial regulations will restrict banks’ risky investments, which may lead to a drop in their issuance of WMPs and, consequently, a fall in yields.

“As regulators are stepping up the crackdown to reduce financial leverage, the growth in WMPs will slowdown significantly this year,” he said.

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