Managing Money Online

　　Internet financial products have enjoyed huge success， but will they change the landscape of China’s financial sector？

　　Wang Kang， 27， works for a Beijing branch of the Industrial and Commercial Bank of China (ICBC)， a major state-owned commercial bank in China and the largest bank in the world by total assets. Despite the fact that her job has given her better access to various types of bank-backed money management products， Wang chose to deposit her money in Yu’ebao (literally meaning “leftover treasure”)， an online investment product provided by Alibaba Group， China’s dominant e-commerce company.

　　Yu’ebao is an online finance platform launched by Alibaba in June 2013 through its third-party payment platform Alipay (a Chinese version of Paypal with 800 million registered accounts)， to allow users to convert spare cash into a money market fund holding.

　　Wang said the reasons she chose Yu’ebao over other investment options include a much higher yield than the government-mandated deposit rate， the lack of a minimum deposit requirement and the ability to transfer and withdraw funds easily and quickly without paying commission.

　　Wang’s is not an isolated case. With its attractive yield， better flexibility and fewer restrictions， Yu’ebao was an instant hit and became China’s biggest online investment service. On January 15， Alibaba Group announced that Yu’ebao had boasted 49 million users with aggregate deposits of 250 billion yuan ($41.3 billion).

　　“China’s financial industry， especially the banking industry， only serves 20 percent of clients， and I see there are 80 percent of the clients (who) are not covered. Financial services should be about serving the layman， rather than playing inside your own circles and making money for yourself，” said Jack Ma， founder and Executive Chairman of Alibaba， when announcing Alibaba’s foray into financial services.

　　China’s financial sector has long been dominated by state-owned or state-controlled banks for decades. Until now， there were few high-yielding and low-risk investment vehicles except for bank-offered wealth management products， which usually have a minimum deposit requirement of at least 50，000 yuan ($8，260).

　　To that end， Chinese Internet companies are making waves by accelerating their online push into financial services. They are using their online expertise and platforms to make financial products developed by fund management firms more available and accessible to all Internet users.

　　An upcoming battle

　　The instant success of Yu’ebao has stirred up competition in the online finance arena. China’s major Internet giants have followed suit and launched similar products.

　　In October 2013， Baidu Inc.， China’s largest Internet search company， launched an online wealth management platform to offer online investment products which would challenge Yu’ebao.

　　On January 15， 2014， Tencent Holdings Ltd. rolled out its first financial services product through its mobile messaging app WeChat to compete against Yu’ebao. The product， called Licaitong， saw its annualized interest rate reach 7.4 percent on January 22， while the People’s Bank of China (PBC)， the country’s central bank， sets the benchmark one-year deposit rate at 3.25 percent.

　　The same day， a similar product was launched by the third-party payment platform affiliated to electronics retailer Suning Commerce Group Co.

　　The battle is not taking place only among Internet companies， but also between them and traditional banks.

　　With more and more spare cash being transferred to online financial platforms， banks are becoming increasingly worried. Instead of sitting idle， some of them， including the Ping An Bank， Bank of Communications and the dominant ICBC， have taken the lead and launched similar products.

　　As online investment products released by several Chinese Internet and e-commerce companies have been gaining more and more popularity， experts are looking to the future to see how that is going to change the landscape of China’s financial sector.

　　Wu Xiaoqiu， a finance professor at the Renmin University of China， said that Internet finance could fundamentally change the Chinese financial sector and that this is a very positive trend.

　　He said that the Chinese financial sector is highly monopolized， so financial institutions do not serve China’s economy well.

　　“Internet and finance match each other well because the core functions of finance can be performed better through the Internet，” said Wu.

　　For instance， Internet payment transactions are quicker， and the processes of applying for and approving loans can be more efficient for both parties with the availability of trading and credit records online. The Internet also helps to manage savings and release information quickly and widely， he said.

　　Huo Deming， an economics professor from Peking University， is less optimistic. Huo said it will take years before online financial products could possibly shake up China’s financial sector.

　　“China’s banking sector has been heavily regulated by the PBC. So， financial services that can be provided through banks are very limited，” he said， when explaining why online investment products like Yu’ebao have become an instant success. “They are potentially a competitor to ordinary banking deposits.”

　　However， Huo said the amount of money invested in Internet finance is still very limited， compared to the enormous deposits placed in banks.

　　A report from Guotai Junan Securities predicts that less than 5 percent of bank deposits or bank-offered money management products will be affected by online financial products， as the latter is now only accepted by young clients， which have low income and haven’t accumulated much savings.

　　Dai Zhifeng， an analyst with Haitong Securities， said 300 billion yuan ($49.6 billion) may represent the ceiling for Yu’ebao.

　　He said that Internet finance can hardly make a difference in the country’s financial sector as larger amounts of capital will tend to flow to banks， which have more professional and catering financial services to higher-end clients.

　　“Internet finance will be a financial supermarket， but won’t be a high-end store.”

　　Potential risks

　　Despite warm welcome from investors， online financial products do have certain risks， including those associated with fund management companies and regulatory bodies.

　　Deposits attracted by those Internet giants are transferred to the oversight of fund management companies， which invest them in money market mutual funds， creating a certain degree of investment risk.

　　Money market funds generally invest in low-risk bonds， including short-term national bonds， central bank notes， bond repurchase and bank deposits. It’s widely regarded as being as almost safe as bank deposits yet providing a higher yield.

　　However， Chen Zhiwu， a finance professor at Yale University， raised concerns about the risks of those online investment products.

　　“If any Internet company is allowed to launch online investment products similar to Yu’ebao， how should regulatory bodies guarantee the credit of those Internet companies？ How will they be punished in case of breach of contracts？ Do those Internet companies have enough incentives to select good investment products for their users？” Chen posited.

　　A major risk comes from regulatory limbo， as some experts say the faster-than-expected development is a result of regulatory arbitrage.

　　Liu Shiyu， Vice Governor of the PBC， said Internet finance is a new phenomenon in the financial sector， therefore the central bank doesn’t have enough data to take a stand.

　　“An observation period must be maintained. Innovations and development in Internet finance will be encouraged while the central bank would closely monitor the development of Internet financial services to ensure companies do not cross any legal boundaries，” Liu said.

　　Huo， the economics professor at Peking University， said the central bank is still observing the trend of online financial products. He said that if Internet finance eventually becomes big enough and that if it is somehow leveraged by enterprises， Internet finance companies will be subject to harsher regulations， he said.

　　“Until then， we will keep our fingers crossed and see how much they can develop in the near future while the interest rate liberalization has not yet been fully implemented in China.”