ALTHOUGH the Chinese central bank has raised interest rates five times so far this year, some investors still shun savings because they consider the rates for their hard-earned funds as negative compared to rising inflation.
The low rates have also prompted banks to expand their portfolio of products and launch more innovative fee-based products to counteract a narrowing interest spread.
Robin Zhang is considering a wealth management scheme under Bank of Communications, in which retail investors can bid for new shares in an initial public offering. Under this scheme investors don't need to put their money at the bank for a year and the bank will use the funds raised in the scheme to bid for shares in an IPO on behalf of the clients.
"At least, the product's returns are better than the deposit rate, if not comparable to the returns in the stock market," said Zhang, in his thirties and a white collar worker in Shanghai.
Zhang is just one of many thousands of Chinese who are opting for stocks and funds rather than saving their money at banks and seeing the value fall against rising inflation.
A central bank survey released on September 20 showed 44.3 percent of households believed the best avenue to boost income now is to buy stocks or funds, compared with 25.3 percent which favored bank savings.
BoCom launched the product on September 13 just days before the subscriptions began for China Construction Bank's nine-billion A-shares. The investment scheme, with a minimum requirement of 50,000 yuan (US$6,649), aims to tap the rising prices of newly-listed shares on their trading debut.
BoCom will bid for any new IPO it views are promising and have potential for growth. Investors can take their money out between the different IPOs. If they don't, they can enjoy the deposit rate existing at the time.
The flexible capital flow is the scheme's biggest selling point against similar products of rival banks.
Subscription for IPOs carries relatively zero risk, especially in the current bullish stock market. As shares always rise on their trading debut, investors who succeed in their subscriptions can enjoy a relatively high return.
For instance, shares of Bank of Beijing gained 81.44 percent to 22.68 yuan on its first trading day last Wednesday.
However, due to the prospects of juicy returns investors made a beeline for the shares, and small-cap retail investors found it hard to bid for them. For instance, only 2.47 percent of retail investors who subscribed for CCB's shares were successful.
"Our new product is designed especially for small-cap investors," said Shi Zhengrong of BoCom's personal banking department. "The product means you can 100 percent enjoy the returns of new shares, though your share of it is determined by your capital."
The Shanghai-based bank said the annual returns of such a product is 15 percent, based on returns of the new shares in the past year.
The product is targeting investors who are not satisfied with the current actual negative deposit rate yet want a low risk product in a volatile stock market.
The People's Bank of China on September 14 announced the fifth interest-rate rise this year, or a second rate increase in less than one month.
The benchmark one-year deposit rate is now 3.87 percent, up from 2.25 percent at the end of 2006. The real interest rate, which sits at 3.6765 percent after a five percent tax, is about half of the 6.5 percent inflation posted in August.
It is widely expected that the central bank will increase the rates one or two more times this year.
Pan Yingli, a professor from Shanghai Jiao Tong University, said the PBOC is likely to raise the deposit rate higher than the lending rate next time as the central bank aims to boost the attractiveness of savings.
Jan Lambregts, director and head of research at Rabobank International in Asia, echoed the view.
The higher increase on deposit interest means that banks are under pressure to narrow the interest spread, which is still a main cash cow for Chinese banks.
"Chinese banks are under pressure to find more sources of revenue and build up their fee-based incomes," said Lambregts.
For instance, BoCom charges 25 percent on the returns of the product.
"We link our business with clients, as no returns for clients means no fees for us," the bank said.
The booming stock market offers lenders a good source of earnings as banks sell funds on behalf of fund management companies and offer stock-related wealth management products to expand beyond deposits.