Explosive growth pushes Alibaba online fund up global rankings; Number of investors in Yu’e Bao exceeds total in China equities

March 10, 2014 12:40 pm

Explosive growth pushes Alibaba online fund up global rankings

By Jamil Anderlini in Beijing

A Chinese internet money market fund that launched just nine months ago has more investors than the country’s equity markets in a sign of how quickly Beijing’s reforms are reshaping the financial services industry.

The total number of investors in Yu’e Bao, an online fund launched by ecommerce giant Alibaba Group in June last year, topped 81m at the end of February, compared with about 77m active equity trading accounts in the whole country at the start of this month.

The explosive growth has propelled Yu’e Bao, which means “leftover treasure”, up the global rankings of the biggest money market funds.

Senior Chinese financial officials told the Financial Times that it had accumulated at least Rmb500bn ($81bn) in deposits by the second week of March, making it the fourth largest money-market fund in the world, according to Lipper, the data provider.

The total market capitalisation of the Shanghai Composite index is worth about $2.6tn.

Investors have been attracted to Yu’e Bao and other online funds by annual interest rates of about 6 per cent for deposits that can be withdrawn on demand, compared with the government-imposed upper limit of 3.3 per cent that banks can offer on one-year deposits.

The rate on offer for ordinary demand deposits in savings accounts at major banks is just 0.35 per cent a year.

Such rapid expansion in a sector of the financial system that did not exist a year ago has led to warnings that it could pose risks to China’s debt-laden economy.

“These [new internet financial products] have the potential to topple the Chinese financial system into the abyss,” said Lv Suiqi, deputy head of Peking University’s finance department. “If the regulators decide to regulate these products more strictly then the yield will drop dramatically. That will make ordinary people withdraw their deposits and then there will be a liquidity problem.”

But the Chinese government has so far been supportive of the new phenomenon and appears eager to continue with rapid financial reforms, including interest rate liberalisation and deregulation of the state’s monopoly in the financial sector.

In his annual “State of the Union” address to China’s ersatz parliament last week, Premier Li Keqiang pledged his government would “promote the healthy development of internet banking”.

These [new internet financial products] have the potential to topple the Chinese financial system into the abyss

– Lv Suiqi, Peking University finance department

The inclusion of the word “healthy” may be a sign of the government’s intention to impose some limits on the largely unregulated internet finance sector but officials say the emphasis for now is on promoting financial innovation.

Intense investor interest in Yu’e Bao and the flood of copycat offerings more recently from companies such as Baidu and Tencent is especially evident from growth in just the past two months.

The number of Yu’e Bao depositors jumped from 49m as of January 15 to 81m by February 26, according to Tianhong Asset Management, Alibaba’s partner in the venture.

Some analysts have criticised Alibaba and others for approaching finance in the same way they approached their internet start-ups – by grabbing market share first and working out their business model later.

A similar fund offered in the US by payments processor PayPal grew quickly when it offered a high yield but eventually closed in 2011 as investors fled when the returns dropped.

The frenzy for online money funds compares with Chinese investors’ disdain for domestic equities, which have been mired in a bear market for years.

Of the 133.3m trading accounts in Shanghai and Shenzhen, less than 55m actually held any equities by the start of this month. Analysts say many of the 22m accounts used to trade the secondary board in Shenzhen are also inactive.