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China’s small banks push rules to the limit as they tap individuals for short-term funds amid liquidity crunch
- Lenders using wealth management app Dainite.com to offer return rates that exceed limits set by Beijing
- More regional banks face bailouts and state takeovers, analysts say
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Small mainland China banks are using online agencies to attract seven-day and 14-day deposits from retail investors, with the promise of big cash paybacks and high interest rates, which suggests they continue to face a liquidity crunch. Beijing has already bailed out three banks since late May this year.
In an advertisement circulated among Chinese investors on Monday night, Dainiter.com, a wealth management app, promises to connect users with rural and urban commercial banks and help users generate annualised returns as high as 14 per cent with ordinary deposit products.
The products, by combining interest income and cash payback rewards as returns for deposits, circumvent Chinese banking laws. The People’s Bank of China has set a benchmark deposit rate for one-year savings at 1.5 per cent. Financial institutions have the right to raise this rate by 55 per cent. A further spike in interest rates is illegal.
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“I would not be surprised if some small banks are using this way to obtain short-term liquidity,” said
Sun Wujun, finance professor with Nanjing University.
“Rural and urban commercial banks are facing a pile up of bad debts. Meanwhile, institutional investors are shying away from small banks since the takeover of Baoshang [Bank], making their finance conditions even more difficult,” he said.
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