China's structured products market is maturing with investors demanding short-term products linked to equities and, preferably, with capital protection, according to Ping An Bank. SRP talked to the bank's head of derivatives and alternative investments, Angel Xin (pictured), about a market she says is in a "rather steady stage of development".
What trends do you expect in China's structured products market this year?
In terms of underlyings, the CSI 300, Shanghai Gold Benchmark Price (price calculated in renminbi) and the A50; for payoffs, the shark fin is the most noteworthy and will be the most popular payoff, because China's investors are easily attracted to high potential returns, which, in reality, turn out to be quite a bit lower than anticipated: for example, potential returns of 9% can be more like 3%-4%. However, when purchasing structured products, investors do not always taking into account the risks associated with the product or its actual costs, the potential returns are all they care about. Another payoff that will be quite 'hot' is the vanilla call.
Average annual returns from structured products have dropped to 5% and lower, according to the Annual Report of Chinese Banking Industry Wealth Management Market 2015. Does that tally with what you see?
Yes, that is right, and this trend is likely to be preserved as the whole money market in China is quite relaxed and, what is more, it is in 'falling interest rate' mode, which is why all product returns will continue to slowly drop.
The majority of structured products in China have a tenor of less than a year. Do you expect the launch of more medium- and long-term products this year?
No, the trend is unlikely to change in the near future. Firstly, because investor demand is not leading into this direction yet - investors have not reached an 'asset allocation' stage yet, and most are led by a speculative investment approach to the market. Secondly, longer-term products are not likely to gain in popularity due to issuers - from a bank's perspective, in view of the fact that China is experiencing falling interest rates, banks don't want long-term debt right now. Ping An Bank has been launching year-long products, and is not planning to launch longer-term ones.
Ping An Bank has index-, interest rate- and foreign exchange rate-, commodity- and share basket-linked products, with the baskets mainly comprising three H-shares. Will A-share basket- or single share-linked products be launched anytime soon?
We have only CSI 300-linked products, but no A-share-linked products, mainly due to the lack of good quality hedging instruments in Mainland China to match single A-shares, coupled with the high levels of volatility associated with these shares.
Most structured products in China have 100% capital protection. Is this tendency likely to change?
Most investors from Mainland China want to buy capital protected products; their risk bearing capacity is not so high.
In what way is the increase in the number of people using digital channels to trade and the boom of online wealth management likely to affect structured products?
Investors buying products online and those who prefer face-to-face contact at bank branches are quite different. Banking products are associated with high costs and, even with low-risk products, 'ordinary people' would rather go s branch in person. On the contrary, online products are associated with higher risk and are aimed at a different target group. Online wealth management products, including structured products, are credit-type products; they have risk, but it is associated with the underlying market. Structured products have different risk ratings and some products are fit for online sales - that is indicative of their risk rating. Other than that, there are high risk products that can be sold only in branches.
Will the rapid growth of online wealth management in China adversely affect the country's structured products market?
No, this is unlikely, in the short-term.
Are shares the riskiest underlying?
No. Shares are most familiar to the average investor, so they are unlikely to consider shares and share-linked products a high risk investment. Moreover, products with 100% capital protection give investors more confidence in understanding the associated risks.
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