Ping An Bank will launch structured products in China linked to the Shanghai Interbank Offered Rate (Shibor), but only at the request of investors, according to Angel Xin, head of derivatives investment at Ping An Bank. “There are certain obstacles to using Shibor as an underlying, mainly that the benchmark is affected by too many factors in the market, which is difficult for us to predict,” she said.
The development of these interest rate-linked products comes in the wake of a rate cut by the People’s Bank of China (PBoC) at the end of February, following a cut last November. “As the interest rate steps down, Shibor should mimic that trend but while maintaining a stable level. Also, the liquidity of funding and timing will affect the Shibor level.
Yu Pan, product manager of the asset management department at Industrial and Commercial Bank of China, agreed, noting that there will not be many Shibor-linked products launched as there are so few Shibor-based derivatives, while the providers are mainly foreign investment banks who unfamiliar with local derivatives.
There were 348 interest rate linked tranche products launched in 2014 in China, with sales of CNY27.8bn (US$4.4bn), according to SRP data. Of them, 88% were linked to Libor and only two were linked to local interest rates: one was a seven-day repo rate-linked product launched by the Agricultural Bank of China and one was a Chinese government bond-linked products launched by Ping An Bank.
Given that the central bank’s interest rate is only likely to decrease, investors will have a bigger appetite for riskier products in the hope of high return, and therefore will need to be more careful and better understand product structures, said Pan. “Low interest rate will benefit structured products,” said Pan. “As a result of interest rate cuts, the yield of fixed-income products will drop consequently. Structured products’ return depends on the performance of the underlyings and are affected less by the interest rate, which may provide a better yield for investors under the low interest rate situation.”
“Investor sentiment towards product tenor may change, adapting to this low interest rate environment,” said Xin. “To maintain yields, investors may go for products that last up to one year instead of the few-month tenors.
“I don’t think there will be a big difference before and after the cut,” said Xin. “Although the benchmark rate has reduced, the upper limit of the deposit rate floating range has also been lifted, meaning no major fall in bank deposit rates. Therefore there is a limited influence on structured products.”
The central bank announced that from March one-year benchmark deposit rates would fall by 25 basis points, to 2.5%. To ease the effect of the rate cut, the PBoC lifted the upper limit of the banks’ deposit rate floating range from 1.2 to 1.3 times the benchmark rate.
So far this year, there have been 63 interest rate-linked tranche products rolled out in the market, and Ping An Bank has issued two institutional products linked to Chinese government bonds.
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