China Says Alibaba Investment Service May Face Penalties, illustrating the challenge the e-commerce giant and other Chinese technology firms face as they expand into new businesses

June 21, 2013, 12:23 p.m. ET

China Says Alibaba Investment Service May Face Penalties

By PAUL MOZUR

BEIJING—China on Friday said a new Alibaba Group Holding Ltd. investment service didn’t comply with regulations, illustrating the challenge the e-commerce giant and other Chinese technology firms face as they expand into new businesses.

The decision was disclosed the same day that the Communist Party’s main mouthpiece published an interview with Alibaba Chairman Jack Ma in which he said China’s financial regulators were “excessive.” While it wasn’t clear whether the two were linked, it offered a reminder that Alibaba will be under a public and official spotlight ahead of an expected initial public offering.China’s securities regulator said Friday that a new Alibaba service that enables Internet users to invest in a money-market fund online wasn’t in full compliance with the country’s regulations. The service, which was introduced by Alibaba’s online-payment affiliate Alipay last week, allows users with money stored online to invest in a fund pegged to corporate debt and government bonds. It attracted more than one million users as of Friday, according to the company.

An official with the China Securities Regulatory Commission told reporters Friday that the company hadn’t submitted all the required information for some accounts related to the fund sales. The official said if the required information wasn’t submitted in a timely manner, it would investigate and penalize the fund.

Despite the setback, the CSRC official said that the commission supports services like Alibaba’s, which it said helps to bring investment opportunities to a wider array of Chinese citizens.

On Friday, Alipay said on its official account on China’s Sina Weibo microblogging service that it was pleased to see that the regulator generally supported its product and that it would meet all requirements on time. Alipay added that it wouldn’t have to suspend the business plan and that investor interests would be protected.

The run-in with the regulator coincided with an interview with Mr. Ma that ran in the People’s Daily newspaper on Friday. In the interview, Mr. Ma said China’s financial regulators were “excessive” and called for more openness in China’s financial system, which he said didn’t serve the majority of Chinese.

“China’s financial industry, especially the banking industry, only serves 20% of clients, and I see there are 80% of the clients are not covered” by their services, he said in the interview, adding, “Financial services should be about serving the layman, rather than playing inside your own circles and make money yourself.”

The episode shows the difficulties a Chinese high-tech company can face as it seeks to expand beyond core industries into ones dominated by large state-run players and powerful regulators. Last month the Beijing government shut down a new online hospital-appointment system that Alibaba had set up through its Taobao e-commerce site. The big success of Tencent Holdings Ltd.’s 0700.HK -1.52% mobile chat application WeChat has led to concerns that China’s massive state-run telecom companies will force it to pay heavier fees for the massive data traffic generated by the application. Tencent has said it is in talks with telecom companies.

CSRC said Alipay would need to submit an agreement with a supervisory bank. According to Chinese regulations, a bank is required to supervise fund sales to protect investors. Alipay has previously said that it had approval from the regulator to provide the investment service.

China’s low interest rates and limited investment opportunities for citizens have hurt many of China’s savers. The fund service offered Alipay’s users a chance to get higher returns than the roughly 0.35% interest rates offered by a savings account with a commercial bank and the 3% one-year deposit rate. Funds of the type Alipay customers can invest in averaged between 3% and 4% growth last year, according to the company.

Alibaba’s financial division has been giving out loans to small and medium-sized companies for the past three years and expects to have a loan-book size of about $2 billion by the end of 2013. But its new deposit service, which allows users to put money in and withdraw it from the fund whenever they like without a penalty, further extends the company into competition with commercial banks.

06.20.2013 15:27

Alipay’s Investment Service Attracts 1 Mln Users in Week

Yu E Bao and its higher yields are already challenging banks’ short-term financing business, analysts say

By staff reporter Wan Shanshan

(Beijing) – Alipay’s online fund investment service has 1 million users one week after launching, the country’s largest third-party payment platform says.

The service, Yu E Bao, was jointly launched by Alipay, the online payment service of Alibaba Group, and Tian Hong Asset Management Co. on June 13. It allows individuals to buy money market funds or other financial products using idle cash in their Alipay accounts.

Tian Hong developed a currency fund product called Zenglibao to connect with Alipay’s Yu E Bao service. Alipay said users can use fund in their Yu E Bao accounts for online payment activities.

Analysts say the online investment option is a challenge banks’ short-term financing business.

Alipay said the annual return for investors was 4.68 percent by June 18, compared to about 3.25 percent for one-year bank deposits.

In recent years, Alibaba has been exploring the online financial services market. In May 2012, it was licensed by the China Securities Regulatory Commission to be a third-party marketing venue for fund transactions. In July, the company launched a wealth management section on its online, consumer-consumer platform Taobao.com.

Alibaba has formed a small and micro financial services unit as one of its three major business pillars along with e-commerce and data mining.

However, some in the industry question whether the Yu E Bao service complies with central government’s requirements because the license allows a third-party to handle transactions for fund purchases, but was vague on their participation in fund sales.

Chen Lian, public relations manager for Alipay, said Alipay only provides a channel for users to buy funds because the money they put into Yu E Bao will be transferred to fund companies to manage.

Alipay has more than 800 million registered users and has more than 20 billion yuan in daily transactions, says Zu Guoming, director of the small and micro financial services unit of Alibaba. In 2012, Alipay handled transactions worth 1.8 trillion yuan.