Figures released by the central bank show that, as at the end of February 2018, the individual and institutional structured deposits of commercial banks totaled RMB8.35 trillion, an increase of 44.9% over last year. In comparison, the total of all banks’ deposits increased by only 10% over the same period. This sharp increase in structured deposits is closely connected to the requirement in the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (officially adopted at the first meeting of the Central Commission for Comprehensively Deepening Reforms on 28 March 2018) that the bank wealth management products shall restructure to promote the products’ net value management.
And it is not only individuals. A significant number of listed companies have also adopted structured deposits as one of the main means of cash management. For example, China Molybdenum Co., Ltd. issued an announcement on 30 March 2018 to the effect that it was planning to use idle self-owned funds not exceeding RMB35 billion in the aggregate to purchase structured deposit products in the next 12 months.
To meet the demand of risk averse investors for the guarantee of principal payment, structured deposits are often of a type with guaranteed principal payment and then, on this basis, enhance returns by adding interest rate, exchange rate, index and other such derivatives. The main difference between ordinary deposits and structured deposits is the fluctuation in the interest on structured deposits and the certain degree of risk that they entail. Accordingly, the expected interest on such structured deposits is generally higher than the interest rate on bank deposits of equivalent term. The main difference between structured deposits and structured wealth management products is that the principal of structured deposits is invested in bank deposits, whereas that of structured wealth management products is generally invested in low risk fixed return assets, with the principal and expected returns falling outside the coverage of deposit insurance.
Whether the product design and sales are in compliance with laws and regulations. Article 23 of the Administrative Measures for the Sale of Wealth Management Products by Commercial Banks issued by the China Banking Regulatory Commission (CBRC) in August 2011 requires that, "where the name of a linked structured wealth management product includes the name of the linked assets, the percentage of linked subject assets of the total capital of the wealth management funds shall be specified in the name of the product or it shall be specified that the underlying assets are linked with expected returns of the principal".
Whether it has the qualifications to trade derivatives. The reason that structured deposits can offer higher returns than those of ordinary term deposits is, no matter nominally or substantively, mainly due to options, in other words, investment in derivatives. Article 7 of the Administrative Measures for the Derivative Trading Business of Banking Financial Institutions specifies that, "a banking financial institution that engages in foreign exchange, commodity, energy and equity related derivatives trading as well as trading in derivative product transactions in the field shall have derivatives trading business qualifications approved by the CBRC".
Consistency of reality with name. At this time, where the popularity of structured deposits has exploded, it is necessary to check whether relevant products genuinely have the nature of a structured deposit or whether a bank is relying on this to subsidize the attraction of deposits. Under the current highly effective regulatory regime, the rules for the administration of structured deposits are soon to come down the pipe. At this juncture where structured deposits are selling like hotcakes, commercial banks need to take precautions by enhancing their trading capabilities and judgment of trends, and increase returns through appropriate investment strategies so as to cause their structured deposits to be worhty of the name.