As Chinese benchmark interest rates hit a record low of 4.35% in October 2015, banks serving retail investors that were used to receiving high yields from plain old deposit accounts were forced to innovate. Ping An Bank, a Shenzhen-based subsidiary of the insurance major, opted to use its commodity business to provide a structured product to meet this new demand for yield.
The bank's total sales volume for gold-related wealth management products reached 23 billion yuan ($3.8 billion) over the 12 months to July this year. The most popular of these products was Ping An Gold, a combination of cash deposit and a gold option, which it launched in the second half of 2015.
Using this structure clients deposit their money with Ping An Bank and then sell it a put option on the gold which vests three months later. So clients receive both interest payments and the option premiums on the settlement date; if the gold price is equal to or higher than the strike price, they receive the principal back with a 10% fixed interest. If the gold price is lower than the strike price, clients will get a Ping An gold share, a gold certificate, made up of the principal and the interest.
"Investors who buy this product usually bet the gold price will appreciate in the medium and long term. So even if the gold price drops a bit in the near term and turns out to be lower than the strike price, they will receive gold with the same amount of money. If the gold price eventually goes up in the longer term, they can still profit," says the manager of the commodity department, who preferred to remain anonymous.
If the gold price looks like it will enter a depreciation phase Ping An Bank can simply redesign the product by allowing clients to sell call, instead of a put, option. The manager says that structuring this product requires a full licence for gold trading, as well as qualification and experience in derivatives trading and pricing.
"Many banks have derivatives products linked to gold but most are cash settled. In our case, investors receive cash if the gold price goes up; if it drops, they get Ping An gold shares instead. So to be successful Ping An Bank has to connect clients' different investment channels, such as commodity trading and cash accounts.
"We also need to have licence for importing gold, in case the need for physical gold suddenly increases. Access to both onshore and offshore gold market shows Ping An Bank has ample access to gold liquidity," the manager says.
Ping An Bank was one of the founding members of Shanghai Gold Exchange, and has a full licence for gold business. This means the firm is able to engage in proprietary trading, agency trading, physical and paper commodity trading, leasing, consignment, pledge, liquidation, warehousing, as well as importing and exporting gold.
Along with precious metals, Ping An Bank has continued to develop its foreign exchange and fixed-income products. Currently, the bank is a market-maker for CNY spot, forwards, swaps and options on China's interbank foreign exchange. Last year, the bank's total forex trading volume has reached $1,200 billion, gaining a 9.29% market share, making it the sixth largest bank in China.
The bank was also one of the first to trade interest rate swaps (IRS) when Chinese regulators mandated they become centrally cleared in 2014, and has increased its total IRS trading volumes by 16% in the first half of this year.
The market expectation of further renminbi depreciation means onshore investors increasingly favour US dollar investments. In order to capitalise on this trend the dealer has applied for permission to trade US dollar-denominated credit-linked notes.
"With interest rate liberalisation, volatilities of Treasury bonds, especially those with longer duration, go up. Many financial organisations face higher risk exposure and are searching for suitable risk management tools. The current five-year and 10-year Treasury futures can meet their needs. We have set the accounting rule, completed and tested a Treasury futures trading system, and have dedicated analysts to study trading strategy," says a manager in the fixed-income department.
Ping An Bank also ramped up its internal risk control by deploying a new system to achieve real-time monitoring of interest rates. To reduce operational risk, the bank implemented a range of automatic transaction feeding mechanisms to monitor internal communications via phone, email and chat apps.