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Monday, December 22, 2014 6:00 PM

Chinese Banks Hemorrhaging Deposits, 1st Quarterly Drop Since 1999; Banks Offer iPhones, Even Cars for Large Deposits

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Chinese banks have experienced an outflow of deposits for the quarter for first time since 1999. Customers are attracted to trust funds and the stock market which has been on a tear, up 43% in the last six months.

In the first week of December, Chinese investors opened almost 600,000 stock-trading accounts, a 62 percent increase over the previous week, according to China Securities Depository and Clearing Co.

To compete for funds, Chinese banks offer anything from fresh vegetables for small deposits to a Mercedes A180 for deposits big enough and long enough. The effective yield on the Mercedes is approximately seven percent!

China Daily explains the setup in Lenders Look to Attract Deposits with Goodies.

Lenders in China, desperate to attract customers who are finding alternatives for their savings, are turning to giveaways. On offer at one branch in Beijing: An iPhone 6 Plus or a Mercedes-Benz.

Cash rebates, trips abroad, interest rates at the highest premium ever over the official benchmark rate, even free vegetables are among other goodies banks are dangling to get Chinese savers to deposit their yuan in savings accounts.

"Chinese banks are hemorrhaging their deposits," says Rainy Yuan, a Shanghai-based analyst at brokerage Masterlink Securities Corp. "There is no fix for this. All the efforts they made to win savers back will only push up the costs, so it's a losing battle to fight."

Higher returns from Internet funds and investment products such as trusts, combined with the promise of a soaring stock market, have China's banks feeling the drain. They lost 950 billion yuan ($153 billion) of deposits in the three months through September, the first quarterly drop since 1999. In the first 11 months, new deposits were 23 percent lower than in the same period last year, People's Bank of China data show.

The iPhone promotion, by Shenzhen-based Ping An Bank Co in October at a branch in Beijing, offered a 128-gigabyte iPhone 6 Plus in lieu of interest payments for depositing 38,000 yuan for five years. For parking 903,000 yuan for the same period, savers could pick one of four Mercedes-Benz models. A Mercedes A180, which costs 252,000 yuan, would give investors the equivalent of an annualized return of almost 7 percent, compared with the benchmark rate of 4 percent on five-year deposits.

The China Banking Regulatory Commission in September banned what it called "illicit" deposit-gathering practices, including gifts and rebates on deposits. Banks that flout the curbs could face punishment, the regulator said, without clarifying whether product giveaways in lieu of interest payments qualify as gifts.
Loan Financing Scheme Will Implode

Think Chinese banks can lend money at rates that exceed 7 percent safely? I don't, and if not, this scheme of attracting depositors will backfire big time.

How big this deposit-chasing scheme gets is anyone's guess, but the root cause is systemic speculation fueled by central banks' loose monetary policies that manifest in different forms in different places.

Mike "Mish" Shedlock

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