Issuance of structured products in China’s mainland market has surged by nearly a third so far this year as a result of Chinese investors seeking yields above fixed income deposit rates. Market players believe the demand for structured products will continue even after the government implements the liberalisation of deposit rates.
According to the SRP database, the number of structured products (mainly structured notes) sold in China under the wealth management scheme wrapper has grown steadily over the last five consecutive years. SRP data also shows that in the first half of the year 1,121 products were brought to market, representing a year-on-year growth of 30.7% on the same period last year.
The annualised average return by a typical wealth management product stands at 5.2% versus 3.25% for one-year deposit in banks, which has also led to a 31.25% increase in issuance of wealth management products compared with last year, according to China Banking Regulatory Commission.
Funding
Hao Zhao, China economist at ANZ Bank, told SRP that the popularity of wealth management products has spiked because they serve as a good substitute to help banks obtain sufficient funding in a controlled interest rate market. “The deposit rate is still under control of the central bank, limiting the ability of the commercial banks to offer competitive savings products with rates determined in a liberalised marketplace,” he said. “Hence commercial banks turn to wealth management products as a way to get around the regulatory grip.”
According to Zhao, the hype around wealth management products is expected to continue but he believes that after the liberalisation of the country’s interest rates there will be a negative impact on fixed income products under the wealth management scheme as their purpose as a substitute for fixed income deposits will no longer be needed.
“The market interest rate is expected to increase in the short term after the liberalisation, so banks should differentiate their product offerings and match the coupon rates with the corresponding risk," he said. "That’s when structured products start to shine as risks and returns will be better aligned."
Rates liberalisation
A product manager at a foreign bank who wished to remain anonymous told SRP that the liberalisation of interest rates will influence the funding cost for structured products, but the exact impact is still not clear to market players.
“For one thing, the fixed income products that invested in deposits may lose their charm as their yield will have to adjust downward,” she said. “Non-capital-protected structured products may pick up the trend at that time. Although they come with risk to capital the corresponding high coupon will make them stand out.”
The governor of the People’s Bank of China, Xiao Chuan Zhou, said at a news conference in March this year that deposit rates will be liberalised in one to two years. Currently the deposit rate in China is 3.25% for a one-year deposit and 4.75% for a five-year deposit.
Related stories:
Shanghai exchange on track to deliver ETF options despite challenges
ELN introduction streamlines Chinese market
Stock index options make way for ETF options in China
Chinese banks shift towards CARs
China regulators delay commodity options launch