2013-12-23

Chinese Deposit Wars Back On; Banks Refuse To Move Deposits and Poach Depositors With Enticing Rates

Back in September, there were worries of another quarter end cash crunch. Banks were actively buying deposits from other banks to avoid fines of ¥10 million. As one banker said, why not spend ¥8 million and save ¥2 million in the process? See Chinese Cash Crunch Could Return in September; Why Not Spend ¥8 million to Avoid a ¥10 million Fine?

Chinese banks are at it again.

年末钱贵:银行贴息6‰“买”资金冲量 (Year End Expensive Money: Banks Discount Bills 6% to Buy Capital)

Deposit war season is back on. Banks are refusing to move large amounts out of their banks, while other banks are offering huge discounts on very short-term deposits. Banks sell bills priced at a discount. Rates have spiked from 3% to 4.5% up to 4.5% to 6%, with time extended to about 10 days.

Banks have also told agents that they won't move large deposits after December 27, to stop their own deposits from being drained as the cash crunch accelerates into year end. Whereas banks typically move money instantly, now they are limited withdrawals and telling customers it may take 1 to 3 days to settle a transfer.

Agents need a couple of days to open accounts. They collect a minimum of ¥50,000 from individuals or small companies and group it into ¥100 million or more (bigger banks want ¥500 million to ¥2 billion), then move it into the target bank on the 29th. On the 1st of January, they move the money out.

Here's an English article from December 12, before this crunch began, that explains the deposit wars.

Deposits Race in China Raises Fears
Chinese banks currently offer an annualized interest rate of between 4% and 6% on WMPs that mature in one to six months. On traditional deposits, the rates they can offer are limited by a central-bank benchmark—which right now means they top out at 2.86% on three-month deposits and 3.08% on six-month deposits.
According to the above Chinese article, investors can now capture this annualized interest rate for very short-term deposits.

These high interest rate products aren't safe though. While there's no deposit insurance in any Chinese bank, these products lend money to distressed borrowers and those with impaired credit.
The main concern among regulators is banks' ability to make good on the principal and interest owed to investors in WMPs, whose risks are often poorly disclosed to investors. Some of the money going into these products has been used to make high-interest loans to risky private businesses shunned by the banks themselves, a phenomenon critics say could exaggerate loan and investment losses in China's financial system if an economic slowdown led to widespread defaults.

Such fears have been exacerbated by the recent collapse of a 140 million yuan WMP offered through a Shanghai branch of Huaxia Bank Co. 600015.SH +0.39% , which ranks 13th among China's commercial banks by assets. Proceeds were invested by a third-party private-equity firm in four businesses in the inland province of Henan, including a pawn shop.

Investors were promised returns of between 11% and 13%, but when the one-year product matured late last month, they weren't paid back—triggering days of protests by dozens of investors and an intervention by Shanghai authorities. The bank is now negotiating with investors to try to reach a "reasonable solution," said people with direct knowledge of the matter.
This leads to a situation where many depositors are chasing high yields:
One of the investors who bought is Zhong Tao, a 62-year-old retiree who said that after years of having savings accounts she withdrew all her money and now rolls it out of one WMP and into another.

"With deposit rates so low and inflation so high," Ms. Zhong said, "I would be stupid not to do this."
Until the music stops.

Back in June banks were taking similar actions, see Chinese bank offers 6% return up front for ¥1 million 1-Yr CD. No doubt there will be similar stories coming out in the next few days.

The central bank has also done a reverse repo worth ¥29 billion, likely no enough to make a dent. And as ZeroHedge points out, the big banks are sucking up the cash, even though the cash crunch is occurring at the small and medium sized banks. See China Folds, "Un-Tapers"; But Repo Rates Remain Elevated

The big banks have direct access to the central bank's easy money, where have we seen that before? And if you think the smaller banks have it bad, imagine what it's like for the small and medium private businesses who are borrowers at these banks.

No comments:

Post a Comment