China’s regulators appear to be preparing to clamp down on the fast-growing internet finance business even as official media start throwing brickbats at sellers of such products, which they accuse of threatening to wreak havoc on the traditional banks’ depositor base.
Rumors are flying thick and fast that the China Securities Regulatory Commission, the capital market watchdog, is planning to tighten monitoring of online financial products and issue stiff entry requirements for players.
Niu Wenxin, a China Central Television financial news commentator, called Alibaba Holding Ltd.’s Yu’E Bao online fund, which has attracted more than 400 billion yuan (US$65.63 billion) in investment from users of the Alipay online payment service, as “a devil and a parasite” in the finance industry.
Writing on his personal blog, Niu said the online fund has been luring clients by promising high yield rates which it passes on to banks where the money is parked; the banks in turn transfer the burden to their loan borrowers in the form of high interest rates.
As such, he said, investors should not at all be happy about the high returns promised by the fund as the ultimate victims will be the people themselves.
He then called on the government to ban such products to prevent them from destroying the financial sector.
Although Niu was making a personal comment by using his own blog, his official capacity as head of the CCTV financial news department renders his views as reflective of some of the official thinking on the issue.
Market views on the online financial service are divided. Some analysts praise Yu’E Bao for its innovative approach and the high investment returns it offers. The opposite view, of course, is that the business model could shake the stability of the financial market.
These online finance products are similar to a money market fund. More than 80 percent of the cash they collect is invested in agreement deposits with banks and the balance as deposit reservation.
To protect the interest of the investors, the securities watchdog is reportedly considering raising the capital requirement for such fund products to cover the unpaid interests.
Along with the success of Yu’E Bao, similar financial products from other major internet companies such as Baidu Inc. (BIDU.US) and Tencent Holdings Ltd. (0700.HK) have also generated massive response from the market.
And these products are blamed for a drop of one trillion yuan in traditional bank deposits in January.
Banks were short of cash to meet requirements in the run up to the Spring Festival holiday, and were forced to offer higher rates to gain money from financial products.
But as liquidity eases, so will the interest rates, and returns from online investment products will eventually subside, fund analysts predict.
The high return on internet finance products is not sustainable, according to some analysts, especially if they invest too much in risky sectors such as real estate and trusts.
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