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. “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. Bank of Jinzhou gets state backing as ICBC, other financial institutions buy stakes “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. For instance, the investment threshold for a seven-day deposit with Henan Yichuan Rural Commercial Bank in central China is 500,000 yuan (US$70,916). A depositor can get 900 yuan as a reward on the day they invest the 500,000 yuan with the bank, and another 187.75 yuan as interest on the seventh day, when they withdraw their savings. By repeating this process, a depositor can generate 55,437 yuan as returns for the year, taking their annualised returns above 11 per cent. China’s small banks still struggling to obtain funds The advertisement says users can repeat this process as much as they like, but they need to open an account with the bank first, by themselves or by entrusting Dainiter.com to help them open an account remotely. Another product the bank offers requires a minimum deposit of 5 million yuan for one year, for 300,000 yuan as a cashback reward and an annual interest return of 108,750 yuan. This pushes the consolidated annual return to 8.2 per cent. Other regional banks providing similar products include Bank of Jinzhou, Bank of Guizhou, Bank of Zhengzhou and Shenyang Rural Commercial Bank. Leadership shuffle at Bank of Jinzhou raises questions about ICBC-led ‘investment’ Bank of Jinzhou was bailed out by Beijing on July 28, with three state-controlled financial institutions acquiring stakes of at least 17.3 per cent in the troubled lender. Its stock has been suspended since April. On July 24, Dainiter.com put out an urgent note asking clients not to open accounts with Bank of Jinzhou, as it had stopped providing such products. The clients were diverted to Henan Yichuan Rural Commercial Bank instead. When contacted on Tuesday, a bank employee said they were not familiar with the matter. Dainiter.com, when contacted, first asked how this reporter had come across the advertisement, and then said all such products had been suspended. China regulators in first state takeover of a private bank since 1998 In late May, state-owned China Construction Bank (CCB) was asked to take over Inner Mongolia-based Bank of Baoshang. In the following clean-up, CCB discounted payments on investments made by institutions, breaking the implicit guarantee that investment in banks was fully covered by Beijing in case of default. But this tightened interbank liquidity, as institutional investors unwound their exposure to smaller players with higher financial risks. Which may have led to these banks turning to retail investors, who have less experience in handling risks, said Nanjing University’s Sun. Chen Shujin, banking analyst with Huatai Financials, said she believed more regional banks were being watched by regulators, and more takeovers were likely. “After market jitters caused by the Baoshang takeover and clean-up, the authorities seem to have shifted back to assuring investors with state credit, and used less transparent measures when dealing with Jinzhou and Hengfeng.”