18 January 2019

How online funds rattle banks with one quick, high-return trick

As if Chinese banks didn’t have enough problems. The lenders are already juggling local government debt, interest rate liberalization and a slowing economy, and now they have to fend off the fast-growing threat from internet finance.

Banking staff working on the deposit side are reportedly going through some very tough times. A pack of online investment funds led by Alibaba’s Yu’E Bao has been drawing money away from savings accounts in a big way, raising the banks’ capital costs and limiting their ability to lend.

Yu’E Bao allows Alipay account holders to use money parked in the accounts to be invested in the fund for a return well above the usual deposit rate. Alipay is Alibaba’s third-party payment service, and buyers and sellers use the accounts to settle e-shopping transactions. Yu’E Bao’s low minimum investment, great flexibility and higher interest rates have made the fund a big hit with investors.

Yu’E Bao does not create value in a strict sense. Its key trick is to lump small sums from millions of accounts together and then use the larger amount to bargain with banks for a better interest rate.

Individuals are making almost nothing from their savings accounts, but through Yu-E Bao, they get an annualized return of about 1.65-7 percent, depending on the day.

Banks are losing out because as the money is shipped out and then put back into them through Yu’E Bao, their funding becomes more expensive.

And the situation is only getting worse.

In January, Alibaba partner Tianhong Asset Management said Yu’E Bao had 250 billion yuan (US$41 billion) in assets under management, up from a standing start just six months earlier. Funds amassed by Tencent’s Licaitong, Yu’E Bao’s closest rival, are estimated to have topped 10 billion yuan. No details are available for Baidu copycat product Baifubao.

Yu’E Bao aims to grow its total to 500 billion yuan this year, the China Securities Journal reports. Analysts say that expansion will be even greater if the big yield gap with bank deposits remains in place.

E-commerce first took business away from brick-and-mortar retailers through cheaper online offerings and now the virtual players are soaking up deposits from banks with higher-yield, money market-style funds.

But for now the total is still quite small. China’s deposits have topped 100 trillion yuan since mid-2013, of which slightly less than half is in savings accounts. That means that these online investment funds still represent less than 2 percent of savings deposits.

But the drain continues and the only thing stopping people from moving more cash out of the banks and into these funds are fears about security — there are reports of hackers stealing money from these online fund accounts. Nevertheless that seems to be a minor concern for investors — people still seem to be focused on the better return.

– Contact the writer at [email protected]


EJ Insight writer

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