Much Interest

　　Ma Weihua， former President of China MerchantsBank， is highly impressed by his first experience of depositingthousands of yuan into a newly opened Yu’ebao account.“The emerging Internet finance product quickly wonmy favor， because I can see how much [interest] I earn aday just by clicking on a mobile phone application，” said Ma.When Alibaba， China’s largest e-commerce group，offered the wealth management service - Yu’ebao - inJune 2013， no one expected that it would soon come intothe spotlight and become a catchphrase throughout therecently closed annual sessions of the National People’sCongress (NPC) and the Chinese People’s Political ConsultativeConference.

　　When traditional banks found themselves caught nappingby Yu’ebao， the rising star had stolen away millionsof customers， and the momentum of the Internet financeshows no signs of coming to a halt. With an earnings ratiomuch higher than bank deposit rate， Yu’ebao has seized atotal of 81 million users with aggregate deposits totalingnearly 500 billion yuan ($81.4 billion) in China.

　　“The Internet is remolding Chinese people’s life. Thesedays， it’s even difficult to take a cab without cellphoneapplications，” said Li Yanhong， CEO and founder of China’ssearch engine Baidu. “Online operation is even moresuited to the financial market， for it involves no physicaldistribution，” said Li.

　　While Internet finance has become an irresistibletrend， it’s more likely to be subject to risks， because onlinefinancial transactions can take place anytime and anywhere.That’s why the government needs to step in andstrengthen supervision over the industry.

　　In the 2014 Government Work Report delivered at theopening of the annual NPC session on March 5， ChinesePremier Li Keqiang made it plain that the governmentwill promote the healthy development of Internetfinance， and improve the mechanism for coordinatingfinancial oversight.

　　Breaking with tradition

　　All that is real is rational. Is that still thecase for Internet finance？ In developedeconomies， few Internet giants can growinto financial heavyweights， because theirfinancial systems are quite complete withsufficient financial services supply and rapidinnovation， according to Pan Gongsheng，Vice Governor of the People’s Bank ofChina， who suggested Internet finance is agood supplement to traditional banking.

　　Internet finance has reached out to the areas of themarket which traditional banks have failed， ignored ordismissed. In the past， traditional banks could afford tomove slowly by earning huge interest margins. However，the emergence of various Internet financial products hasnow broken such a balance.

　　“Internet finance has laid down a challenge to traditionalbanks， because interest rates have not yet beenfully freed，” said Ma.

　　According to statistics， the bulk of the money collectedby those Internet financial products is invested inagreement deposits with an interest rate that can be ashigh as 10 percent. If banks are caught in money shortages，which usually happen at the year-end when peopletend to withdraw their deposits and when the centralbank and China Banking Regulatory Commissionset out to do checks， they would turn to thesemonetary funds to fill the gap. As more andmore bank customers move their deposits toInternet financial vehicles like Yu’ebao， bankswill see the money scarcity intensified.

　　The banking sector is being forced to thinkhard about interest rate liberalization.

　　Yang Kaisheng， former President of Industrialand Commercial Bank of China， believedthat interest rate liberalization would allowbanks to decide the cost of absorbing depositsaccording to their assets and liabilities， capitaladequacy ratio and development strategies.

　　“If Yu’ebao still exists when interest rates forbanks are liberalized， its earnings ratio will beanalogous to the rate of demand deposits，” said Yang.Moreover， Internet finance has filtered into almost allsectors， not just the banking realm.

　　“With high interest rates， Internet financial productshave attracted a significant strand of customers intotransferring deposits from their saving accounts. That willsubstantially increase the financing cost for enterprises，”argued Liu Liehong， President of China Electronics Corp.，a sentiment echoed by Cao Dewang， Chairman of FuyaoGlass Industry Group， who worried that higher lendingrates would cause the growth of China’s manufacturingindustry to stumble.

　　Nonetheless， Zhang Xiaoji from the DevelopmentResearch Center of the State Council believed Internetfinance needs support from the manufacturing sector.“If there is no producer， how can Taobao vendors keeptheir businesses running？ In fact， the market will strike abalance between the two.”

　　Pan said that people should not set Internet financeagainst the real economy， as the former can expandfunds supply to small and micro businesses， diversifyfinancing channels， improve transaction efficiency andreduce trade costs.

　　Supervision imperative

　　Wealth management products like Yu’ebao and Licaitong，a similar product launched by China’s Internet giantTencent， are just one sort of Internet finance， an areawhich also comprises Internet payment， peer-to-peerlending， micro-loans， crowd funding， online marketing ofinsurance and fund products， etc.

　　Some Internet financial companies had dabbled inthe fields that exceeded their capacity of risk managementand control， which would breed an array offinancial dangers， warned Yan Bingzhu， Chairman of Bankof Beijing.

　　“The government should reinforce the legislation forInternet finance， and make clear the rights and duties oftrade subjects， requirements for market access， and thestandards of transaction behaviors，” said Yan. “Effortsshould also be made in ensuring fair trade， establishingthe credit system， and protecting consumer rights.”

　　Pan also held that the supervision of Internet bankingneeds to be further upgraded and standardized. “Differentapproaches should be taken to tackle differentInternet financial products. Supervision should be reinforcedfor products with high risks and be moderatelyreduced for those that have already become full-fledged.Meanwhile， different oversight departments should becoordinated to supervise financial products，” said Pan.In addition， market-oriented reforms， such as relaxingprice regulation in the traditional financial sector， shouldbe pushed forward， while market access should beexpanded to admit more micro-financial institutions andprivate capital into the financial market， said Pan.