What Opening Up a Bank Account Taught Me About Oil Futures
A pedestrian wearing a protective mask walks near hand sanitizer sitting on a table at an Industrial and Commercial Bank of China Ltd. (ICBC) branch in Beijing, China. (Photographer: Giulia Marchi/Bloomberg)

What Opening Up a Bank Account Taught Me About Oil Futures

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(Bloomberg Opinion) -- With a quarter of its interest-bearing assets overseas, Bank of China Ltd. is by far the most international and outward-looking of China’s largest lenders. But have you tried banking with them lately? 

I have. In mid-January, I was eager to open an account in Shanghai. With China vowing to increase access to its financial services industry, this process has become a lot easier for people like me, overseas Chinese with a foreign passport — or so I heard. I also desperately needed a mainland account to top up mobile payments on AliPay and WeChat Pay. These apps have become so ubiquitous that the sorry few without them are practically walking down the streets of Shanghai naked. 

At first, I went to China Merchants Bank Co., because it boasts a strong retail franchise and has a well-designed app. But the process would take up to 10 business days. Only Bank of China has the regulatory clearance to do the paperwork within 24 hours, a friendly branch manager told me.

Entering the Bank of China building in Shanghai’s financial hub of Lujiazui felt like going into a courthouse. It was grand, stern and silent. Forty minutes into the extensive know-your-customer paperwork, the teller informed me that I needed a local mobile number; it would cost the bank too much to send text messages to my Hong Kong line. Sensing a lot of legwork and stressed about meeting a deadline, I fled. 

This kind of bureaucratic inflexibility is costing the bank dearly, and not just my small pile of deposits. Retail investors have lost more than $1 billion from a synthetic WTI futures product that was enthusiastically sold in the spring. The lender sat on its hands until the last day to roll over its May futures and got caught selling at negative $37.63 a barrel, making it the world’s biggest (known) loser amid last week’s oil tumult. 

It’s not like this volatility came out of nowhere — there had been plenty of warnings. Even U.S. President Donald Trump knew the world was running out of oil storage, which is terrible news for WTI futures because they require physical delivery. Fearful of volatility, global banks from Citigroup Inc. to UBS Group AG in late March liquidated leveraged exchange-traded notes. On April 16, United States Oil Fund, the world’s largest oil ETF, said it would allocate about 20% of its portfolio to a longer-dated contract, from nil previously. Bank of China was either asleep at the switch during those weeks or too caught up in red tape to tweak its exposure.

Since the bank is so keen on know-your-customer, let’s examine this practice a little more closely. How synthetic oil futures are a suitable investment for moms-and-pops is beyond my understanding. Each WTI contract consists of 1,000 barrels of oil for a reason — they’re intended for professionals. But to lure retail money, Bank of China diced these up, allowing investors to buy in units of barrels. More than 60,000 clients invested, Caixin reported. 

In a tone-deaf post last week, which was promptly deleted after a media firestorm, the lender disclosed how this product works in detail, with financial jargon ranging from rollover pricing to margin selling. What’s unexplained, however, is why Bank of China, with over $3 trillion in assets, bothered with this complex retail experiment at all. 

The answer is the banking system. The same factors that have long benefited China’s megabanks are now working against them. For years, the biggest lenders lived comfortably off household savings, paying deposit rates that were capped by the People’s Bank of China. Smaller regional banks, meanwhile, had to scramble for short-term, unstable and expensive interbank funding.

What Opening Up a Bank Account Taught Me About Oil Futures

Now the tide is turning. The PBOC is offering more liquidity, which has caused a sharp drop in money market rates. These days, funding costs can be even lower at less creditworthy regional banks. Meanwhile, a 30 basis point fall in the loan prime rate — the benchmark interest charged for banks’ best corporate clients — means that large lenders will see more compression in their loan books’ profit margins. Money has to be made somewhere, which is how we wound up with these enthusiastic sales of exotic futures products.

Back in January, all the talk in Lujiazui was of the future of China’s wealth management industry. As part of Beijing’s financial reform, big banks are marching in and setting up separate asset management arms. Registered capital of these new subsidiaries often reaches more than $1 billion, surpassing the size of mutual funds many times over. Would these megabanks become the new BlackRocks of China? 

Not to worry. Bank of China’s spectacular tumble makes a fine example of these whales and their slow-moving money. In reality, such lenders have little incentive to be nimbler. From 2013 to 2018, state-owned banks sent more than 2 trillion yuan ($282.3 billion) in taxes and dividends to Beijing’s coffers, versus only 135 billion yuan from their non-financial counterparts, data provided by UBS show. Coddled state darlings don’t feel much pressure to study up and improve their trade. As for all the grand ambitions of cross-border portfolio diversification, some whales are ending up at the Chicago slaughterhouse to be butchered by savvy billionaire raiders like Carl Icahn. 

As for me, the next time I’m in Shanghai — whenever that is — I’ll have to hold my nose and try Bank of China again, because I have only 473 yuan left on my WeChat Pay account. Its building is just a stone’s throw from International Finance Center, where many global banks have their offices. But it feels so distant. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

©2020 Bloomberg L.P.

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