As the calendar year draws to a close in 2024, structural deposits have surged in popularity, particularly among smaller banks and foreign-capital institutionsSome of these products are offering annualized yields that could reach as high as 7%, enticing investors in a financial landscape exhibiting ample volatility.
For the uninitiated, structural deposits typically intertwine traditional savings with a derivative—often hedged against volatile assets such as gold, foreign currencies, or interest ratesThis combo can appeal to investors who seek to capitalize on potential market gains while also safeguarding their principal investmentHowever, finance professionals stress the necessity for depositors to thoroughly understand the unique structure of each product, as well as the associated liquidity and market risks that come with them.
Every year, the banking sector experiences a rush for deposits toward the end of the fiscal year, as institutions grapple with pressures to shore up their capital
In this frantic period, banks may resort to offering higher yields as a lure for customersThis approach, though effective in the short term, must be strategically balanced with a bank's overall asset-liability management in order to maintain financial sustainability.
Ai Yawen, a senior analyst at Rong360 Digital Technology Research Institute, emphasizes that the heightened demand for funds by year-end prompts banks to ramp up their deposit acquisition efforts"Beyond traditional fixed-term deposits, several smaller banks are introducing structural deposits to attract more capital," she notes.
The performance data observed by Rong360 indicates that late December of 2024 saw a spike in favorable interest rates on structural deposits being offered by many banks, especially smaller onesJiangnan Rural Commercial Bank, for example, launched various structured deposit products between December 25 and December 30, including a 39-day product with an anticipated annualized return of 2.10%, and a one-year product expected to yield 2.80% annually.
Yet, the backdrop of falling interest rates in 2024, largely influenced by the People's Bank of China establishing a new round of cuts, has complicated the situation for depositors
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National data from the same year noted a consistent decline across various timeframes for deposit ratesFor instance, in October 2024, the average interest rate on a three-month fixed deposit registered at 1.268%, a clear drop from the rates that preceded it.
Senior researcher Su Xiaorui from Substantial Intelligence Research elaborates on the two common types of high-yield products launched by banks: limited-availability deposits issued to attract new clientele, and widely advertised options with fewer restrictionsGiven the competitive landscape, medium-sized banks are opting for structural deposit offerings, which not only promise higher rates but also allow for a more tailored approach depending on demand and market conditions.
The impending financial assessments at year's end have necessitated that banks, particularly the smaller factions, ramp up their issuance of structural deposits if they hope to stay competitive against larger counterparts
However, this strategy is not without its risks: too many high-yield offerings can drive up borrowing costs for the banks themselves, ultimately affecting their profit margins.
In recent findings from analysts at Postal Savings Bank, there is a consensus that the year-end inflow of deposits driven by high yields has its upside but also requires prudenceThe concerns center on the balance a bank must maintain in their asset-liability structure against the backdrop of fluctuating rates.
A key figure in this discussion, Bai Wenxi, chief economist at the China Enterprise Capital Alliance, likens structural deposits to a tool for stabilizing capital inflowHowever, he warns that as institutions raise the stakes on yields, they could inadvertently increase financial pressure that could, over time, diminish profitability.
Market dynamics are shifting too—foreign banks such as Standard Chartered and HSBC are pushing out structural deposits, some offering eye-popping projected yields upwards of 7%. For example, a structured deposit introduced by Standard Chartered in mid-December 2024 showcased a principal-protected investment linked to GBP/USD exchange rates, with a reach for profits ranging between 1% to 7% annually.
One of the core traits of structural deposits is their hybrid nature, combining standard deposit features with financial derivatives
As they are not straightforward “savings,” investors must grasp that while there is a safeguard of principal, the actual returns hinge on fluctuating market performance, which can be catalyzed by economic indicators such as commodity prices and currency stability.
Risk experts, like those from Standard Chartered, have clarified that while their products fall under an "investment" classification, with varying degrees of security, potential investors need to remain vigilantSome structural deposit products are marketed as partially principal-protected, meaning there exists a chance for losses in the capital invested.
Ai Yawen further elaborated that high yields towards year-end often happen when volatility in linked assets peaksTherefore, many see structural deposits as a way to sidestep the strictures of traditional savings whilst reaping a degree of investment reward—an especially salient point for those wary of typical financial instruments.
Under normal circumstances, holding a fully principal-protected route such as a structural deposit carries less risk when compared to direct forex investments
This cushioning is what many investors find appealing—loss potential is limited, examining market performance and securing returns also becomes less daunting.
In light of the above dynamics, financial advisors urge cautionInvestors should treat high-yield structural deposits with a critical eye, analyze where funds are being channeled, and delve into the specifics of yield promises, understanding that they vary greatly from one product to anotherThe complexity of how these products might respond to market shifts could affect overall yield outcomes in unpredictable ways.
Ultimately, the growing interest in structural deposits amidst market fluctuations underscores both opportunity and riskUnderstanding the nuances—like liquidity limitations, the specific nature of linked assets, and the stipulations surrounding returns—will be integral to making informed investment decisions as we step into the new year.