17 January 2019

The case of the half-hearted bank hit-back at internet funds

The only way to beat them is to join them — sort of. Top and second-tier banks, including household names like Industrial and Commercial Bank of China (01398.HK), Bank of China (03988.HK) and China Merchants Bank (03968.HK), have all got on the money market fund bandwagon to head off the exodus from deposit accounts into popular online products led by Alibaba’s Yu’E Bao.

It could be a worthwhile move but while the banks are more than capable of hitting back at full force with their own products, doing so could hurt them as much as their rivals. They may end up holding on to the client but money will still be shipped out of deposit accounts and into funds, raising funding costs for lenders.

For example, if deposits in savings accounts drop by between 2.5 trillion yuan (US$410 billion) and 3 trillion yuan a year, banks will have to pay up to 200 billion yuan more in funding costs, wiping out most of the industry’s average annual profit gain, according to a China Securities Journal report.

As funding costs climb, banks coud also become more selective in lending, making it more difficult for borrowers to get loans.

Internet fund products sell themselves as a creative path to better returns for customers. But in practice, many of them simply pool funds from small savers and bargain with banks for a higher term deposit rate.

Rather than creating value, Yu’E Bao and copycats like Tencent’s (00700.HK) Caifutong and Baidu’s Baifubao are simply eating into bank margins and indirectly raising the cost of money for the country.

The internet wealth management industry is growing rapidly and that raises safety concerns, given how volatile money markets have proved in places like the United States, the Journal added.

It hasn’t gone unnoticed. China’s securities watchdog is reportedly mulling tighter controls over the products. It’s about time.

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EJ Insight writer

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