“…Yu’e Bao is like a vampire that has climbed on to the body of banks. It is a classic financial parasite.”
Strong words from Niu Wenxi, financial editor at China Central Television (CCTV), as he lashed out at an online investment fund launched by Chinese internet giant Alibaba last summer.
While directed at Alibaba’s financial services product Yu’e Bao, Niu’s comments are logically aimed at other such products, including Licaitong, which was launched by Alibaba’s archrival Tencent in January, and attracted more than RMB1 billion ($164 million) in the two days following its launch. Given that internet firms offering innovative products over web and mobile platforms are not an old phenomenon, it is not quite clear how such funds are “classic” financial parasites, but this was not all Niu wrote:
“It is attacking the financing costs of Chinese society as a whole and attacking the overall economic safety of China…”
Such funds may or may not have an effect on China’s economic safety, but what is certain is that they are not attacking (read: “increasing”) the financing costs of Chinese society as a whole. In fact, by paying a more reasonable rate of return to depositors, these financial services products are simply redistributing where the total financing costs fall, not increasing them.
Why? Depositors receiving the repressed interest rates in China’s “normal” banking system are effectively subsidizing the financing costs of the banks’ borrowers. If Chinese savers continue to flock to these products (which effectively give them access to money market rates), then this subsidy is simply being removed. Financing costs to the borrowers may increase if the higher rates are passed onto them, but for “society as a whole” – which includes the financially repressed depositors; there is no such a phenomenon.
Alibaba stuck back at Niu in its official micro blog on Saturday, “I used to have just two steamed vegetable buns in the morning. Now I can have two steamed meat buns! This motivates me to work that much harder for our motherland’s economy every day.”
Since June last year, Yu’e Bao has attracted around $66 billion in funds from users. For the time being, this trend of money flowing into funds offered by Alibaba, Tencent, Baidu and even Suning will continue. China still lacks a de jure deposit insurance scheme for its banking sector (although almost everyone assumes a de facto government guarantee on normal banks), so technically such products are fairly equal to deposits, other than the huge difference in interest rates offered (up to 16 times higher than the government rate for demand deposits) and the method of investing (mobile phones and online wallets).
For readers familiar with China’s financial system, the idea of higher interest rates being earned by investors is reminiscent of the Wealth Management Products (WMPs), themselves controversial, being distributed by banks.
However, whereas WMPs normally come with a minimum investment level that puts them beyond the reach of the majority of Chinese, the online investment products offered by Alibaba, Tencent, Baidu et al have no such conditions. Finally, lower income individuals and households can have access to the higher interest rates that have been enjoyed by their wealthier peers for years. Providing it is allowed to continue, the online funds represent a blow against a mechanism that has only been exacerbating China’s serious wealth inequality.
These online investment products are yet another drain on the liability side of China’s banks’ balance sheets. Rather than getting access to deposits at less than 0.5 percent per year, they sometimes must borrow the same funds in money markets at much higher rates.
Provided they do not grow so large as to threaten China’s financial stability, as Niu seems to fear, or somehow collapse and rob investors of their cash, it is hard to see how such funds are a negative thing for China’s people or its economic rebalancing.