21 August 2019
The state banks’ restrictions on Yu'E Bao and Alipay don't make much sense from the point of view of consumers. Photo: Bloomberg
The state banks’ restrictions on Yu'E Bao and Alipay don't make much sense from the point of view of consumers. Photo: Bloomberg

Yu’E Bao steps on the tail of the mighty banking dragon

If you still need an example of how vested interests are using their monopoly to choke innovation and deter reforms, China’s financial sector provides a new one.

China’s big four state-owned commercial banks are clamping down on popular online payment and financial products because they hate competition.

These banks have either suspended instant transfers via channels such as Alipay, the payment arm of Alibaba, or lowered their ceiling for such transfers to as low as 5,000 yuan (US$800) per transaction. Earlier, there was no limit or the ceiling was much higher.

Accordingly, the banks’ depositors have felt their freedom has been greatly hampered in transferring their own money, via Alipay, to Alibaba’s internet financial product Yu’E Bao. This restriction has significantly diminished one of the product’s strong selling points, namely convenience of use, which has helped it beat rival products designed by regular financial players including the big four banks.

State banks have also limited or banned Alibaba’s money market fund product from investing in contracted deposits.

Yu’E Bao, which roughly translates to “leftover treasure”, collects small, idle money from individuals and invests it in the money market, and promises higher returns than interest from bank deposits. It has attracted more than 80 million users to move their money from their bank deposit accounts, shaking the huge and cheap deposit base enjoyed by the traditional financial institutions.

State banks’ utter dislike, if not hatred, for Yu’E Bao is obvious. Their clampdown on the product came even after the People’s Bank of China, citing security concerns, rolled out measures to regulate the internet financial sector by suspending plans by Alibaba and Tencent to launch virtual credit cards and putting on hold the quick response code payment, a convenient payment channel mainly through the mobile phone.

The central bank’s move makes some sense, but the state banks’ restrictions on Yu’E Bao and Alipay certainly don’t.

In China, banks can attract deposits at a government-set annualized rate of about 3 percent. Financing costs for them are even lower, if the demand deposit rate of 0.35 percent is considered. With this advantage and their large networks, banks monopolize most of the country’s low-cost capital.

But other financial players, such as fund managers and loan companies, will have to face a market rate of about 8 percent. The gap means that banks can automatically enjoy an interest gap of 5 percentage points.

In this situation, banks always emerge as the biggest winners, with depositors and other financial players gaining little.

But products like Yu’E Bao changed the distribution of profits by giving depositors more benefits. Most of the money raised by Yu’E Bao are re-invested in banks as contracted deposits, thus allowing depositors to enjoy a higher interest rate than regular deposits.

And with its low investment threshold (1 yuan) and super convenience (investors can draw their money anytime), Yu’E Bao lets depositors know that they don’t have to always put their money in banks. The artificially low deposit rate ceiling was hence bypassed, and prompted a migration of depositors from banks to online finance.

Internet finance, which mainly serves small business owners and individuals, has brought real competition to the state-owned banking giants, which has gotten used to making easy money by relying on their monopolistic status.

Banks now have to dismount their high horses and face the competition. They recently raised their regular deposit rates to the upper end of the floating band, something they rarely did since the band was introduced.

Some banks also significantly lowered the threshold and increased the liquidity of their wealth management products.

These latest actions by the banks show that competition is good for consumers and the economy as a whole.

But banks are unhappy, and they took the chance to curb the growth of internet finance by placing limits and banning products like Yu’E Bao to invest in their contracted deposits.

Such moves reek of monopolistic practice, and show how interest groups leverage their resources and lobbying power to choke competition.

If banks should ban Yu’E Bao, why do they accept contracted deposits from other money-market funds? If they think Yu’E Bao is illegal, why did they take action against it only after it grew so large as to be able to pose a real competition?

The recent developments shed light on the difficulty of shattering the monopoly in China’s banking industry. They also highlight the importance of allowing private investors to set up banks and allowing the existence and growth of diversified, multilayer financial players to cater to the needs of individuals and companies of all sizes.

With banking licenses, private investors will be able to draw deposits legally and their cooperation with internet financial players can pose even greater competition to the state banks.

– Contact the writer at [email protected]




The writer is an economic commentator. He writes mostly on business issues in Greater China.

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