China’s online funds under fresh fire

Last updated: February 23, 2014 12:42 pm

China’s online funds under fresh fire

By Simon Rabinovitch in Shanghai

Funds launched by the likes of Alibaba have been lambasted as parasites that are endangering China’s economic health by a prominent commentator, the latest salvo in a battle that pits new online funds against the traditional banking system they are shaking up.

The war of words over the weekend is a sign of the growing controversy over the online investment funds, which were launched less than a year ago but have alreadyupended traditional business models

in China’s banking system.

Alibaba, the e-commerce company behind the biggest of the funds, shot back at the criticism, saying that its product is providing a service to the economy by putting more money in ordinary people’s hands.

The Chinese government caps bank deposit interest rates to limit what it fears could be damaging competition in the financial sector. Online investment funds offered by internet companies such as Alibaba andTencent have effectively blown a hole in that ceiling by giving savers direct access to money-market funds.

Thus depositors receive a maximum 0.35 per cent on demand accounts, while those investing in the Alibaba and Tencent funds are more than 15 times better off with an annualised rate of 6 per cent – prompting a rechannelling of cash from banks to online funds.

Regulators have so far done little to crimp the online funds’ development, viewing them as healthy innovations. But the attack by Niu Wenxin, a financial editor with the state broadcaster China Central Television, suggests they could begin to face tougher opposition. Mr Niu called for the outright prohibition of Alibaba’s Yu’e Bao fund.

“It is attacking the financing costs of Chinese society as a whole and attacking the overall economic safety of China,” he wrote in a blog post published on Friday. “Yu’e Bao is like a vampire that has climbed on to the body of banks. It is a classic financial parasite.”

With Mr Niu’s comments circulating widely, Alibaba used its official microblog early on Saturday to fight back. In a post calculated to appeal to the general public, Alibaba said its fund was helping to make working people richer and the economy stronger.

“I used to have just two steamed vegetable buns in the morning. Now I can have two meat buns! This motivates me to work that much harder for our motherland’s economy every day,” Alibaba said.

The light-hearted tone of Alibaba’s response belies the severity of its challenge to Chinese banks. From its launch in June last year until the middle of February, its Yu’e Bao fund had already attracted more than Rmb400bn ($65.7bn) of savings. With overall bank deposits growing by Rmb2.5tn during that time, it means that Alibaba is getting nearly one renminbi for every five deposited with Chinese banks.

With Tencent launching a fund in January on its popular WeChat messaging app, analysts say the migration of cash away from traditional bank accounts is accelerating.

“Interest rate liberalisation had been placing pressure on the profits of Chinese banks, but the pressure wasn’t all that great because the process was only being driven by the government. Now, Yu’E Ba is speeding up the process,” said Jin Lin, a banking analyst at Orient Securities.

“Although not a big portion of demand deposits yet, these funds are growing quickly and eating into the banks’ territory.”

China’s banks have started to mount a counter-attack by launching their own online investment funds. Industrial and Commercial Bank of China, Bank of Communicationsand Ping An Bank, among others, have all introduced products in recent weeks that are linked to money-market investments and offer roughly the same interest rates as the Alibaba and Tencent funds.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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