The deposit insurance system that the State Council of China will introduce on May 1 will not include structured deposits and related wealth management products. “Even with ‘deposit’ in the product name, these are still recognised as investment products and will not count as deposits in bank balance sheets,” said a product manager at China Merchants Bank (CMB).

The set-up will lead to a better understanding of investment risk for investors, said Hui Fang, trader of derivatives trading at Industrial and Commercial Bank of China. “Investors will need to understand that banks, even they are government-owned, will not pay for product default caused by bankruptcy, and it will help them to consider the risk of products they are subscribing to.”

The State Council of China announced that all financial institutions that take deposits in China will need to set up funding for deposit insurance in case of bankruptcy. For every depositor, up to CNY500,000(US$80,942) will be protected by the scheme at any single depository institution in China, and any amount above this ceiling will be exposed to bank solvency.

“All of our structured deposits are capital-protected, but, on bankruptcy, investors will not be able to get back any capital or have any compensation, similar to other investment products,” said the product manager. “Our investors will be well informed before subscribing that structured deposits are not real deposits.”

The CNY500,000 limit will cover 99.63% of depositors, so the implementation of deposit insurance will not trigger ‘deposit migration’ in China, according to Huang Xiao Long, deputy director general at the People’s Bank of China. “Also, the insurance funding should be invested in bonds with high credit rating, like a government bond or central bank note.”

There are currently 65 structured deposits launched in China this year, according to SRP database. CMB, Industrial Bank and ICBC are the main providers of these products and they are all linked to gold, which is a familiar underlying for Chinese investors.

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