Beijing vs. Banking Innovation; State banks and regulators take on Internet finance
April 15, 2014 Leave a comment
Beijing vs. Banking Innovation
State banks and regulators take on Internet finance.
April 1, 2014 11:57 a.m. ET
China’s state-owned banks are ramping up their assault against Alipay, the online payment service launched by e-commerce giant Alibaba. The fuss centers on its money-management fund that since last June has been offering consumers higher returns than traditional deposits. It turns out the old banking order and its cronies in Beijing won’t allow financial liberalization to happen without a fight.
In recent weeks China’s Big Four state-owned banks have all capped the amount that users can transfer to systems like Alipay. None of the four now allows a consumers to transfer more than 10,000 yuan (about $1,600) at a time, or 200,000 yuan ($32,000) a month. Industrial & Commercial Bank of China 601398.SH 0.00% announced last week that only one of its 16,500 branches nationwide will conduct business with Alipay. And regulators in Beijing have prohibited online funds from using virtual credit cards or quick response (QR) barcodes, citing security issues.
Internet finance holds less than 1% of Chinese bank deposits, but state banks worry that its runaway success will cut their access to capital. Alipay’s money-managing fund Yu’ebao has amassed $80 billion in assets in nine months—making it a “vampire sucking the blood of banking,” according to one prominent state media commentator.
In the real world, Chinese consumers care little about the blood of banking. What interests them is that state banks cap deposit rates to provide state-owned enterprises with cheap capital, leaving laymen hungry for higher returns. Hence the appeal of easy-to-use Internet funds like Yu’ebao, even though some consumers may not understand the risks of investing in interbank loans, as these funds typically do to earn their higher returns.
Regulations to date haven’t made Internet finance more transparent—merely less competitive. While Beijing banned online funds from using QR codes in mobile payment, it left alone the state-bank platform UnionPay, which uses a similar technology and takes a larger cut of transactions.
If state banks keep getting their way, Beijing will soon start requiring online funds to keep more money in reserve and cap transfers to just 10,000 yuan ($1,600) a month. This would be a big win for the old banking order.
The culprit here is the Communist Party’s longtime stranglehold over banking, which props up the Party at the expense of innovators and consumers. If regulators continue to squeeze online finance, investors will have even more reason to doubt Beijing’s purported commitment to a more open economy.
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