21 February 2020

Decoding the hype on new Yu’E Bao product

Alibaba Group’s fund management platform Yu’E Bao {餘額寶} has announced that it will launch on February 14 an insurance product exclusively for its users. The expected yield of the product is 7 percent, far more than that offered by similar products in the market. Not surprisingly, it has caught the attention of the public, and over 1.5 million accounts have been registered for the investment since Feb. 8. The rush is understandable, but are investors getting carried away too much?

For this venture, Alibaba picked a one-year-old start up, Pearl River Life Insurance {珠江人壽}, as its partner, not any reputable insurer with proven record or strong capital base.

Unlike the previous offering of Yu’E Bao – a flexible combo of savings account and unit trust in which one could invest as little as one yuan and take out the funds anytime, users this time have to invest at least 1,000 yuan with a lock-up of minimum one year.

More importantly, instead of investing in money market funds which have high liquidity and credit rating, sources from Pearl River Life have admitted that the money will be invested in higher yield items like infrastructure projects, reported.

So what sort of infrastructure projects? A salesperson from the insurer told Yicai that the funds could be used as investment in real estate and infrastructure projects connected to the shareholders of the insurance firm.

The biggest shareholder of Pearl River Life Insurance is Chu Mangyee {朱孟依}, chairman of property developer Hopson Development Holdings (00754.HK), and his family. They control a total of 60 percent stake.

Real estate, infrastructure and finance are the Chu family’s three core businesses.

Hopson Development has had a good run in the past but has now fallen behind in the industry. It was the first property developer in China to break the 10 billion yuan annual sales mark, achieving it in 2004. However, since then the business has lagged behind rivals even as the nation’s real estate market took off in a big way.

Hopson Development achieved 11.2 billion yuan in contracted sales last year, failing to meet its sales target for the fourth straight year. Its sales were just about one-tenth of that of its Guangdong rival Country Garden Holdings (02007.HK).

Worse, mainland media has reported that Chu’s family businesses are experiencing some financial hardship. And that Chu’s motive in expanding his financial ventures is to gain better assess to funding.

If the reports are correct, investors in the Yu’E Bao insurance product may see their funds funneled to support Hopson’s property business, which faces big challenges as its scale is now way smaller vis-a-vis first-tier developers. That makes the investment look like a high-risk wealth management product.

Basic insurance contracts of similar duration offer roughly 3.8-5.0 percent. With the Yu’E Bao product now offering as much as 7 percent, investors should ponder as to where the extra yield will come from.

At the end of the day, everything comes with a price. There is no such thing as a free lunch.

– Contact the writer at [email protected]


EJ Insight writer