24 April 2019

Danger lurks in internet funds’ untested waters

In just two years, the internet finance market has exploded from nothing to a field with about 30 competing investment products, according to the China Securities Journal.

The offerings have surged in popularity with the promise of easy, safe returns with a low investment threshold. But some observers say the products are not as risk-free as they claim to be.

The sector can be divided into three categories. The first covers products sold directly through fund houses, among which China Southern Asset Management and Guotai Asset Management Co. are pioneers.

Then there’s Alipay’s Yu’E Bao and UnionPay’s Tian Tian Fu, which are sold through third-party payment companies. Each of these lets users invest idle money in their e-commerce accounts in one particular fund.

Last but not least are funds sold through third-party sellers like Tencent and, which give customers a wide array of fund choices.

The products have been big winners but Yang Kaisheng {楊凱生}, former president of ICBC (01398.HK, 601398.CN), has issued a word of caution about their dangers, citing the case of international third-party payment company PayPal as an example.

PayPal rolled out a product similar to Yu’E Bao back in 1999, Yang wrote on earlier this month. It was the prototype of the products now popping up in China and just like Yu’E Bao it was a smash hit. In no time at all, it had ballooned to US$1 billion, on par with the roughly 6 billion yuan (US$980 million) Yu’E Bao has amassed so far.

But the financial tsunami of 2008 spelled the end of this innovative product three years later. The credit crunch meant some money market funds “broke the buck”, which means the funds’ net asset value dropped below US$1 per share. The squeeze eventually forced PayPal to shut down the service.

Yang said that although this situation is extremely rare and the conditions may not be replicated in China, the sellers of these funds have not spelled out the products’ risks, raising the prospect of serious problems in the future.

– Contact the writer at [email protected]



EJI Weekly Newsletter

Please click here to unsubscribe