Banks in the U.S. once gave away toasters and irons to lure depositors. Banks in China are upping the ante. With customers pulling out money and putting it into higher-yielding investments, they are offering Mercedes, iPhones, and daily deliveries of vegetables to sidestep interest rate caps and get people to stash some yuan in savings accounts.
“Chinese banks are hemorrhaging their deposits,” says Rainy Yuan, an analyst at brokerage Masterlink Securities in Shanghai. China’s banks lost 950 billion yuan ($154 billion) of deposits in the three months through September, the first quarterly drop since 1999. In the first 11 months of the year, new deposits were 23 percent lower than in the same period last year, People’s Bank of China data show. Offering incentives to attract money is not the solution, Yuan says: “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.”
Savers seeking higher returns have been pouring money into online money-market funds offered by the e-commerce companies Alibaba Group (BABA) and Baidu (BIDU). One fund, Yu’E Bao, started last year by Alibaba affiliate Alipay, drew 535 billion yuan in its first 15 months of existence from 149 million customers, more than the populations of France and the U.K. combined. Users simply tapped a few buttons on their mobile phones to secure an annual rate of return that climbed as high as 6.8 percent before falling to about 4 percent recently.
Savers can also earn more on their money by moving to high-yield products, the fastest-growing part of the so-called shadow banking system. Households put 12.9 trillion yuan into high-yield trust products as of Sept. 30. Trust companies pool investor capital to put money in real estate and construction projects, or make corporate loans, and promise returns of more than 10 percent. Trust companies have seen assets under management rise more than tenfold since the start of 2009.
The Shanghai Composite Index’s 45 percent surge over the past six months has led people to shift money from banks to stocks. 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 & Clearing.
To stimulate the economy, China’s central bank on Nov. 21 announced a cut in benchmark interest rates for the first time in more than two years. That was offset by the central bank’s decision to raise the maximum interest rate banks can pay customers to 20 percent over the benchmark from 10 percent above it. Ping An Bank (000001:CH), China Citic Bank (601998:CH), and Bank of Ningbo (002142:CH) immediately alerted customers through text messages that they would offer the highest rate allowed.
The China Banking Regulatory Commission in September banned what it called “illicit” deposit-gathering practices, including gifts and rebates on deposits, without clarifying whether product giveaways in lieu of interest payments qualify as gifts. Banks that flout the curbs could face punishment, the regulator said. The warning hasn’t deterred banks. The iPhone promotion, at a Beijing branch of Ping An Bank in October, 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.
In northern Shanxi province, Industrial Bank offered a gold pendant for a one-year deposit of 10,000 yuan. Also in Shanxi, Citic Bank promised a daily supply of eggs and vegetables for three weeks to elderly customers who deposited 10,000 yuan, Shanxi Daily reported in November. In Ningbo, Ping An Bank is giving cash instead of gifts. Savers can get 258,000 yuan of interest payments immediately when depositing 1 million yuan, or receive an interest-and-principal payment of 1.3 million yuan in five years. A spokesman for Ping An Bank declined to comment.
Central Bank Governor Zhou Xiaochuan pledged in March to deregulate interest rates fully in one or two years. That will increase pressure on bank earnings as the companies compete for savers’ money by offering higher rates, according to Liao Qiang, a director at Standard & Poor’s in Beijing. “The battle for deposits will only get worse as China moves ahead with interest rate liberalization, which will drive up banks’ funding costs and hurt profit,” he says.
The bottom line: After withdrawals of $154 billion in the latest quarter, Chinese banks are trying giveaways to lure cash.