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Derivatives

China Seen Poised For Equity-Linked Deposit Takeoff

Strong growth is expected for equity-linked deposits in China this year, in part because of prodding encouragement by local regulators keen to develop the mainland market.

Strong growth is expected for equity-linked deposits in China this year, in part because of prodding encouragement by local regulators keen to develop the mainland market. The products, offered by onshore banks to wealthy clients, are structured by international houses who provide the derivative components from their offshore desks. One derivative official estimated the market should grow from 10's of millions to 10 or more times that size in the next few years and could rival Hong Kong's massive structured deposit business.

"There are not a lot of choices for high-net-worth individuals. In the past they preferred to keep dollars close to their chest, but there is potential for these types of products in the local market," said Elaine Lai, general manager of wealth management at Standard Chartered in Shanghai. Late last year Standard Chartered launched the first equity-linked deposit deal in China and is preparing to close its fourth deal sold via its local branches, linked to the FTSE/Xinhua China 25 index using a bull option spread.

Lai said the bank spent some time working with financial regulators to get the product off the ground. Regulatory officials, including the China Banking Regulatory Commission are pushing for more local participation in equity-linked investments as part of further market liberalization. "I expect many more players to enter the arena. The regulators are encouraging local banks to offer these types of products," said Lai. Regulators are favoring lower-risk structures such as index-linked instruments over more volatile single-stock products. Officials in the banking supervision department at the CBRC in Beijing declined comment.

Major domestic firms including Bank of China are exploring the concept. "It's still a niche market that will require a lot more investor education but this will take off longer-term," said an official at BOC, confirming the bank is also eyeing the product. "In the coming years it will be an important market but it will take significant time and effort," agreed Min Park, managing director and head of Asian equity risk management at UBS in Hong Kong.

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