By Simon Rabinovitch in Beijing
A scramble to retain customers who are pulling their money from traditional deposit accounts is causing Chinese banks to use alternatives that regulators fear could undermine the financial underpinnings of the economy.
China places a ceiling on deposit rates as a way of limiting competition among banks and to fortify the capital positions of institutions that had in effect been insolvent a decade ago. But with inflation nearly 3 percentage points above the rate ceiling many depositors want better returns, forcing banks to come up with new ways to retain deposits. Their main technique has been the issuance of wealth management products, which typically are loans repackaged as short-term investment vehicles and are held off balance sheet. Annualised rates can be as high as 8 per cent, more than double the one-year deposit rate.
Beijing has been trying to rein in the explosive growth of these products. Last week, the China Banking Regulatory Commission warned that the business had ?exposed problems and weaknesses? in the banking sector and stepped up its crackdown with an 80-point directive.
It told banks that wealth products could not be used as a backdoor technique for raising interest rates or for attracting new deposits. It also ordered them to be more forthcoming in disclosing risks to investors.
The latest regulatory orders will not come into effect until next year. In the meantime, the growth of wealth management products has continued.
According to official data, bank deposits rose Rmb730bn ($114bn) in September, a sign that on the surface all is well. But analysts said banks had probably sugar-coated their books with end-of-quarter deals to attract deposits temporarily.
Analysts say banks manipulate the deposit data by offering short-term products that allow them to bring deposits back on to their books for a few days at the end of each month when official data are compiled.
Official media have also reported that the nation?s biggest banks had seen a net outflow of traditional deposits in the first half of September.
A more accurate reflection of the situation was found in data released by the central bank on Friday. The broad M2 measure of money growth, which includes deposits but not wealth products, was nearly 1 percentage point below forecasts.
? The Financial Times Limited 2011