Yu E Bao Deals with the Pressure of Being No. 1

Yu E Bao Deals with the Pressure of Being No. 1

01.22.2014 18:39
The fund company behind the WeChat investment service must handle a huge amount of money every day, but one manager says risk control remains the top concern
By staff reporters Zhang Bing and Cao Wenjiao
(Beijing) – It took less than seven months for the fund company that manages Yu E Bao to become the country’s largest public funds manager, a place that China Asset Management Co. held for seven years.
As of January 15, Yu E Bao has more than 250 billion yuan in investment from over 49 million users, says Tian Hong Asset Management Co., the company that manages Yu E Bao. That makes it the 14th-largest money market fund in the world, data from Bloomberg shows. Combined with other investment funds, the amount managed by Tian Hong has exceeded 260 billion yuan.
Meanwhile, China AMC’s public funds were worth about 244.7 billion yuan at the end of last year and reportedly have not changed much in January. It has formed a partnership with social networking company Tencent Holdings to challenge Yu E Bao through a similar wealth management service embedded in the voice and text messaging app WeChat.
Wang Dengfeng, a Tian Hong fund manager who oversees the money market fund connected with Yu E Bao, said in a recent interview that controlling risk is his company’s biggest priority.
Yu E Bao limits its investments to just 29 banks on a safe list, he says, and prudence demands that, “We don’t venture outside the list.”
An excerpt of the interview follows.
Caixin: How do you allocate funds from Yu E Bao?
Wang: About 80 to 90 percent of the money from Yu E Bao accounts will go to interbank deposits and the rest to safe bonds. Interbank deposits are banks’ wholesale businesses with each other. The demands are vibrant.
We allocate investments and match maturities based on data analysis. At different stages a bank’s ability to take deposits varies. On one hand, there are banks that can only take, say, 10 billion yuan, but we have 11 billion yuan that needs to be taken care of. That is when we hit the limit of their deposit-taking ability. We can deal with other banks or lower the interest rates we charge. On the other hand, a larger size brings greater negotiating power. We can ask for higher interest rates.
We pay the most attention to liquidity management. So far, we have seen a net increase in Yu E Bao investment. That means we face the pressure of finding investment opportunities for new funds every day.
Do you often get higher interest rates from small banks?
That is generally the case, but large banks may offer higher rates if they are caught short of cash. This is a matter of less concern to Yu E Bao because we limit our investments to only 29 banks that are on our white list. We don’t venture outside the list. Most of those banks are state-owned or large joint-stock banks. We think it is not worth the risk dealing with small banks. It is not that we think they would actually default on loans. But we would like to avoid the risk altogether to be prudent.
There are many wealth management services similar to Yu E Bao. What is the strength of Yu E Bao?
First, the core value of our team is prudent wealth management. We have placed risk control in the highest place. Second, Yu E Bao operates on Alipay (the third-party payment service run by e-commerce giant Alibaba Group). It is connected to more than 49 million ordinary people and retail investors. That makes it particularly deep-rooted in society. Third, it brings the function of money market fund investment and payment together. The user experience is good. There are, of course, other funds being developed with a payment function. But we have been at the frontier.
What is the impact of interest rate changes on Yu E Bao? Some people say Yu E Bao’s yield will stop rising. What is your view?
The yield of Yu E Bao goes with the cost of capital in the market. In December, there was a rebound in money rates, and the yield of Yu E Bao also increased. When money rates were low, the yield of Yu E Bao was low as well.
We will try to repay investors with moderate returns on investment. If the money market goes weak, it is normal for our yields to fall. But it would not happen all of a sudden. Neither do we promise to deliver any rate of returns. Yields are not our primary concern. We are most concerned with risk control.
The U.S. payment company PayPal introduced a money market fund service in its second year. It shut it down in 2011 as investment shrank. Do you worry that this may be where Yu E Bao is headed?
We have been thinking about this since the first day Yu E Bao was launched. Now that we have grown, whether we will become a second PayPal is more of an issue. The puzzle is not only ours. It is true for the entire money market fund industry.
A big question is: If China has a zero interest rate like the United States, is there still a reason for money market funds to exist? This may not happen very quickly, judging by current conditions. For China to have zero interest rates for a long term, it has to have gone through a very large economic cycle.