PBOC tightens regulations on banks’ interest rates on structured deposits

The People’s Bank of China, the central bank, has further tightened regulations governing relatively higher interest rates on structured deposit products of commercial banks earlier this month, in order to lower the cost of banks’ liabilities and eventually also lower the borrowing costs of small businesses.

Sun Guofeng, head of the monetary policy department of the PBOC, told a news conference on Sunday that the central bank will continue to push for a notable decline in various lending rates through multiple measures, including reduction of commercial banks’ irregular innovative deposit products.

The larger idea is to support the resumption of production and sustain economic development amid China’s battle against the novel coronavirus outbreak, Sun said.

A structured deposit is essentially a combination of a deposit and an investment product. Typical financial instruments linked to such deposits include market indexes, equities, fixed-income instruments, commodities, foreign exchange or a combination of these.

The return on a structured deposit consists of the guaranteed interest, which is earned at the minimum rate of return that a bank promises to offer, and the return on the investment product, which depends on the performance of the underlying assets.

The PBOC said the minimum rates of return on structured deposits provided by some banks should be regulated, for they are noticeably higher than the conventional deposit rates.

The minimum rates of return on banks’ structured deposits will henceforth be included in the PBOC’s macro-prudential assessment system and the market interest rate pricing self-discipline mechanism.

The average return on 1,049 yuan-denominated structured deposits that matured in January was 3.71 percent, according to data from the Rong360 Jianpu Technology Big Data Research Institute. China’s benchmark one-year deposit rate is 1.5 percent and benchmark three-year deposit rate is 2.75 percent.

The PBOC move appears to have struck a chord with market mavens. “Regulating the minimum rates of return on structured deposits will effectively help banks break out of the prisoner’s dilemma on attracting deposits by offering higher savings rates. When principal-protected deposit products with relatively high interest rates are no longer available, depositors will have no other option but to choose products that carry higher risk but offer lower returns,” said analysts led by Ma Kunpeng with SWS Research Co Ltd in a report.

“It is expected that the forceful measures taken by the PBOC will significantly reduce the cost of liabilities for banks, drive loan pricing lower and underpin the real economy.”

Structured deposits have grown rapidly in China since 2018 due to increased competition for deposits and new regulations that ban the issuance of principal-protected wealth management products.

At the same time, problems including irregular product management and misleading product sales have emerged, said an official of the China Banking and Insurance Regulatory Commission in October.

On Oct 18, the CBIRC had also tightened regulations on banks’ structured deposits to control risks and protect investors’ interests.

The measure lowered the outstanding amount of banks’ structured deposits to about 9.6 trillion yuan ($1.37 trillion) at the end of December.

But, at the end of January, the figure rose by more than 12 percent to 10.79 trillion yuan, according to PBOC data.

This month, the PBOC again emphasized that banks should continue to rectify irregular deposit products, and forbade banks from paying higher interest for premature withdrawal of newly issued time deposits, including large-denomination certificates of deposit, relative to rates on demand deposits.