Chinese Banks Match Tech Firms in Race for Deposits; Funds Offering About 6% Returns Compete With Products From Alibaba, Tencent, Baidu.

Chinese Banks Match Tech Firms in Race for Deposits

Funds Offering About 6% Returns Compete With Products From Alibaba, Tencent, Baidu.

Feb. 24, 2014 6:19 a.m. ET

BEIJING—Chinese banks are trying to take on innovative tech companies that have set up successful investment funds in a contest that is reshaping China’s banking industry.

A number of banks, including big state-owned lenders as well as smaller ones, have launched a flurry of investment products to compete with the money-market funds introduced by their tech-sector rivals.

In June, China’s e-commerce giant Alibaba Group Holding Ltd. launched a money-market-like fund called Yu’e Bao or “leftover treasure.” It had scooped up 400 billion yuan ($66 billion) in assets by mid-February. The success has prompted other tech firms, includingTencent Holdings Ltd. 0700.HK +0.87% and Baidu Inc. BIDU -0.08% to follow suit in recent months.

Now traditional banks are jumping into the fray. Industrial & Commercial Bank of China Ltd.601398.SH +0.30% , Bank of Communications Co. 3328.HK +0.40% , Ping An Bank Co.000001.SZ +1.08% and China Guangfa Bank all have launched similar money-market funds that promise about 6% returns. These rates are competitive with the funds offered by tech companies but far higher than the modest returns from bank deposits, which are subject to government caps on deposit rates. A savings account offers a minuscule interest rate of 0.35%, while a one-year fixed deposit at a bank can pay just 3.3%.

Yu’e Bao and other similar products provided by tech companies are offering about 6% returns on even small amounts that an investor can withdraw any time. This poses a threat to Chinese banks and will continue to exert pressure on their deposits, said Orient Securities bank analyst Jin Lin.

“Banks have to introduce their own money-market products, or their territory will be gradually chipped away. Once the clients are lost, they won’t come back,” Mr. Jin said.

Tech firms so far haven’t dented deposits in the banking system. China’s banks held a total of 73.21 trillion yuan ($12 trillion) in local-currency deposits at the end of January. But the offerings have attracted tech-savvy Chinese investors who are looking for higher-yields and are unhappy with low deposit rates at the nation’s banks.

In January, ICBC, the country’s largest bank by assets, introduced a money-market fund called Tiantianyi, or Profit Every Day. ICBC’s product, issued by its own fund-management company, offers an annualized rate of about 6.1%.

There is no data available on the size of the funds offered by ICBC, Bank of Communications or Guangfa Bank. But Pingan Bank says its money-market fund, which was launched in November, had pooled 963 million yuan as of Feb. 11. By comparison, Yu’e Bao added 150 billion yuan in a one-month period ended in mid-February.

The banks, while eager to guard their share of deposits, are warily watching to see whether the higher rates push up their costs.

“We are in a bit of a dilemma about introducing our own money-market product,” said a banker with an ICBC branch in Hangzhou in east China’s Zhejiang province. “The fund will compete with Yu’e Bao but it definitely will drive up our funding costs,” she said.

ICBC has made the fund available only in Zhejiang at this point and the bank doesn’t yet have plans to advertise heavily, according to the banker. Press representatives for the bank declined to comment.

China’s citizens are big savers. They were saving at a rate of more than 50% of the nation’s gross domestic product in 2012, the highest rate among major economies, according to the International Monetary Fund.

But Chinese still have few investment choices. While property has long been a favorite, the government has slapped curbs on the real-estate market, dulling their enthusiasm of late. Investments offshore are also restricted, and China’s own stock markets are hardly a winner, with prices still below levels of six years ago.

The China Securities Regulatory Commission has said it is working with other regulators to draft rules on Internet finance. These rules could cut into the fast growth of these funds.

“The impact [of tech company money-market funds] is still marginal for now. But banks also have sensed a possible threat, and they are coming up with similar products and taking other measures to counter the possible impact,” said Christine Kuo, senior credit officer with Moody’s rating firm.

 

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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