Internet finance in China: Foe or frenemy? China’s giant banks are under attack

Internet finance in China: Foe or frenemy? China’s giant banks are under attack

Mar 1st 2014 | SHANGHAI | From the print edition

COULD internet-finance entrepreneurs upend China’s banking sector? The notion seems preposterous. After all, China is home to the world’s biggest banks. Its financial sector is heavily regulated, making life difficult for disruptive innovators. Yet these same goliaths are now under attack from online funds that are offering returns that are 15 times higher than those allowed on conventional deposit accounts at regulated banks.

China’s cap on deposit rates at banks is causing money to flood into shadow-banking products such as those offered by “trust” companies in search of higher yields. Offerings by internet firms, with their large existing customer bases, have opened the spigots wider.

Alibaba, an e-commerce firm, led the charge with Yu’e Bao (“remnant treasure”), which allows customers to invest money parked in their accounts at Alipay, its online-payment service. Though launched only last June, it has already attracted some 400 billion yuan ($65 billion). Baidu, an online search firm, and Tencent, which makes online games, have also since entered the fray.

Some see these online firms as a serious long-term threat to banks and the government’s ability to control the financial sector, prompting noisy demands (mostly by banks) to regulate the upstarts. Regulators have not yet expressed a clear view, but some observers see signals of a looming regulatory crackdown in attacks by the official media; a financial editor on the state-run television network recently branded online financial firms vampires and parasites.

Online funds are indeed hurting the banks. For one thing, they are sucking away money: banking deposits fell by one trillion yuan in January. May Yan of Barclays observes that the internet firms use their deposits mostly to lend money at high rates to banks that are facing a squeeze on deposits.

So will this lead to massive disruption of the sector? Possibly, but Ms Yan thinks not. Though growing fast, as a share of total banking deposits the internet firms’ are minnows today. UBS, an investment bank, calculates that even if a tenth of bank deposits flee to online products (a heroic assumption), it might cut the net interest margin at banks by just 0.1%. China’s conservative regulators may well clamp down if the upstarts become big enough to pose systemic risks.

 

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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