Returns on structured deposits have seen a marked decline in February as China’s financial regulators flag heightened scrutiny of bills arbitrage following a surge in bills financing at the outset of 2019.
On 25 February the China Banking and Insurance Regulatory Commission (CBIRC) announced that “the problem of bills arbitrage will be subject to strict penalties,” prompted many commercial banks in China to launch their own internal investigations into the practice.
Data from Rong360 indicates that 135 structured deposit products were issued during the final week of February (22 to 28 February), for an increase of 20 compared to the preceding week.
The average expected return for structured deposits was 4.21%, for a decline of 11 basis points compared to the preceding week, with analysts pointing to concerns over heightened regulatory scrutiny as a key reason for the decline.
Premier Li Keqiang warned of the risk of bills arbitrage and other forms of “empty funds transfer” following a surge in bills financing and undiscounted banker’s acceptances in January.
Data from the People’s Bank of China (PBOC) indicates that bills financing saw a marked increase in January, with new on-balance sheet bills financing and off-balance sheet undiscounted banker’s acceptances hitting 516 billion yuan and 378.6 billion yuan respectively, for increases of 481.3 billion yuan and 234.9 billion yuan compared to the same period last year.
New on-balance sheet bills financing and off-balance sheet undiscounted banker’s acceptances jointly accounted for 19.3% of total social financing, for an increase of 13.5 percentage points.
The Chinese central bank subsequently said that the window for bills arbitrage had closed following a decline in returns on structured deposits.
Central bank data indicates that as of the end of 2018 the structured deposit balance of China’s commercial banks was 9.62 trillion yuan, for an increase of 2.66 trillion yuan, or 38.27%, compared to the reading of 6.96 trillion yuan at the end of 2017.
In January the commercial bank structured deposit balance was 10.98 trillion yuan, for an increase of 1.36 trillion yuan compared to December, or an on-month rise of 14.19% and a rise of 37.67% compared to the same period last year.