Baidu CEO Calls for More Regulation of Online Funds

Baidu CEO Calls for More Regulation of Online Funds

PAUL MOZUR

March 3, 2014 11:56 p.m. ET

BEIJING— Baidu Inc. BIDU +1.57% Chief Executive Robin Li has joined the chorus of Chinese government advisers and banking executives calling for more regulation of the country’s quickly growing Internet finance industry.

Speaking at a meeting of an advisory body to China’s parliament on Monday, Mr. Li said he saw the potential risk in the sale of finance products by Internet companies, and that government oversight should be strengthened.

“People in the Internet industry are not financial experts,” Mr. Li said on the sidelines of the meeting of the Chinese People’s Political Consultative Conference, according to the Xinhua News Agency. A Baidu spokesman on Tuesday confirmed the comments.

The comments came as officials weigh the growing popularity of investment funds sold over the Internet. On Tuesday, People’s Bank of China Gov. Zhou Xiaochuan said the central bank wouldn’t “crack down” on the products, but will improve regulations in the sector, according to Xinhua.

Chinese regulators are looking at creating tighter regulations for the products, people familiar with the matter have told The Wall Street Journal. At the same time, these people say, they don’t want to squelch innovative products that could shake up the country’s sluggish financial system, which many economists say does a poor job serving smaller businesses and individuals.

Baidu’s Mr. Li said the company is marketing financial products created and administrated by third parties, not products the search giant has created itself, “since we don’t have the license or other [financial] abilities. This brings risk,” he said, according to Xinhua.

Since last summer, China’s largest Internet companies, led by Alibaba Group Holding Ltd., have begun selling money market-like funds directly online. The funds offer returns far above traditional savings accounts in China by investing in interbank loans and deposits as well as bonds. Alibaba didn’t respond to a request for comment.

The ease of use for Chinese investors and the widespread advertising capabilities have led Chinese to pour billions of yuan into the funds. The most popular Alibaba product, Yu’E Bao, as of last month had attracted more than 400 billion yuan ($65.4 billion) and had about 81 million user accounts. Baidu hasn’t disclosed the amounts it has sold.

China’s state-dominated banking sector has complained that the new products could drain money from the banking system. In just nine months, Alibaba’s Yu’E Bao has already attracted the equivalent of roughly 0.5% of the country’s 74.2 trillion yuan worth of deposits. A report issued last week by brokerage China International Capital Corp. projects that in three years products like Yu’E Bao could manage funds comparable to 8% of bank deposits.

Echoing Mr. Li’s sentiments at the meeting, a former president of the Industrial & Commercial Bank of China Ltd., Yang Kaisheng, said both online and offline financial services should be subject to the “same regulatory supervision.”

The China Banking Association said in a report last week that money-market funds—like those marketed by Internet firms—should set aside reserves to meet liquidity shortages, making them more like banks and potentially denting their profitability.

A former adviser to China’s central bank, Li Daokui, said at the same event that Yu’E Bao and similar funds should allocate additional capital to protect against risks. Internet firms say they can make use of past records of online spending to predict when their users are likely to take money out of online accounts.

Some bank analysts and economists say Internet firms won’t find the data much help if China’s economy slows rapidly, since China hasn’t been through a recession in 30 years. If companies are unable to predict a large-scale withdrawal, investors in the funds could face significant losses as assets would have to be sold at low prices to generate liquidity for the money-market funds, they said.