BEIJING (Reuters) - On a recent brisk Beijing morning, the competition for depositors was in full swing at a Bank of Communications branch office.
Instead of enduring long lines and inaudible tellers, anyone asking about wealth management products is whisked immediately to a bulletin board and an attentive saleswoman.
Taped to the board is a printout with the day's offerings for those with 50,000 yuan or more -- each product available for a limited time only and each offering interest rates well above the state-set deposit rate.
These products, sold by most of China's big banks, are effectively liberalizing China's state-set interest rates and are making regulators -- and some analysts -- nervous.
"It's really changed the dynamic in the banking system. It's one of the biggest changes in the last few years," Charlene Chu, banking analyst for Fitch Ratings in Beijing, told Reuters.
"Within a year we're talking about trillions and trillions of payments the banks now have to pay to depositors who are migrating between bank wealth management products and that's putting a strain on the cash flows."
Chinese banks had 7.7 trillion yuan (729 billion pounds) in wealth management products outstanding as of the end of the third quarter, equal to almost 10 percent of total deposits, according to Fitch estimates.
Since May, Chinese banking regulators have issued at least five warnings about wealth management products, which were pioneered as a way to repackage some loans and get them off lenders' books. That allowed banks to keep lending while China was trying to restrain a speculative bubble by forcing banks to keep reserve ratios high and effectively rationing credit.
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But having to keep track of, and make good on, a pool of products with various interest rates and terms is a new challenge for Chinese banks, which for years have benefitted from a state-set spread between deposit and lending rates.
"We've been calling the wealth management offering business de facto deposit rate liberalization," Chu said.
Regulators worry the short-term products allow banks to move obligations off their balance sheets too easily, while Fitch cautions that it's increasingly hard to match the timing risks of when obligations become due.
Chu worries banks could see cash flow problems, especially if an economic slowdown also threatens borrowers' ability to pay back loans. For the past decade or more, Chinese banks' massive and growing cushion of deposits allowed them to simply roll over non-performing loans without much damage to their operations.
There is a risk that the surge of investors who followed the clamour of the pack to buy into guaranteed returns all make a similar dash to recover their cash should the products not pay out as promised and word of disappointment and loss spreads.
Other analysts say such worries are overblown, viewing it as the nature of banks to have a mismatch between short-term commitments to depositors and long-term returns from borrowers.
"It's true the government needs to be cautious when banks are trying to be innovative," said Ting Lu, China economist for Merrill Lynch in Hong Kong.
"But we don't see it as a core issue."
Despite the warnings and official restrictions, banks continue to offer products with terms that range from less than a week out to a year at interest that exceeds normal savings rates by 2 percentage points or more.
Depositors fed up with negative real interest rates in their normal savings accounts have flocked to the wealth management products, eagerly switching between banks to chase higher returns.
Money flowing into traditional deposit accounts has dipped as a result, while a Wall Street Journal editorial recently hailed the "self-reform" of China's banks, liberalising interest rates despite the regulators.
Regulators have so far focused on products with terms of less than a month, outright forbidding them in November.
A Reuters visit to banking branches in Beijing this month found that banks have gotten around the ban by issuing non-fixed "cash flow" products of one month or 33 days. Depositors earn lower interest rates, but pay no penalty if the money is withdrawn earlier.
"I started buying these products this spring, because all our money is saved in the bank and interest rates are very low. The products promoted by the banks carry interest rates that are higher by half again," said Li Lifang, the wife of a tailor in Jiangsu Province, who varies her business between the two state-owned banks nearest her home.
"I just buy whatever products the tellers recommend. The higher the interest rate, the better."
Interest rates can go as high as 4.5 percent for a one-year product that guarantees both principal and interest, compared with 0.5 percent on a normal savings account. Higher-risk products structured around repackaged loans reach 7 percent.
Wealth management customers interviewed by Reuters viewed the products as carrying no more risk than bank deposits, even though some products guaranteed principal only, some principal and interest, and some carried no guarantee at all.
That means banks have some cushion against the 7.7 trillion yuan that Fitch estimates are linked to these products, which are marketed as riskier repackaged loans but typically don't carry much information about the underlying instruments.
Still, almost no-one expects the Chinese government to actually allow small-time depositors to take a hit, even if banks wash up against a liquidity crunch.
The stability-obsessed Communist Party would not want to see middle class depositors out in force on the streets, as happened in Hong Kong when similar products went south.
Editing by Don Durfee and Nick Edwards