Alibaba riches lure China’s bank depositors

Li Mingyang only joined Alibaba’s investment platform one month ago but he has already transferred

almost all the cash in his bank account – nearly Rmb200,000 ($32,000) – to the online fund.

He is far from alone. More than 30m people in China have signed up to Yu’E Bao, or “Leftover

Treasure”, only six months since its launch.

Initially pitched by the Chinese ecommerce group as a platform for its users to manage excess funds in

their online payment accounts, Yu’E Bao is becoming something far more powerful: a straight-up

substitute for traditional bank deposits.

“There’s no point in keeping money in the bank any more. This is just as reliable, more flexible and

you can earn a lot more from it,” Mr Li says.

A quick swipe of the Yu’E Bao app on his phone shows the Shanghai-based editor that he has earned

more interest on his account over the past day than 94 per cent of other local users – an indication

Mr Li is one of the bigger Alibaba converts, though not the biggest. “This is fun, almost like a

computer game,” he says with a belly laugh.

For every Rmb12 that companies and individuals have deposited in Chinese banks since June, they

placed roughly Rmb1 in their Yu’E Bao accounts, according to Financial Times calculations based on

official data. While it remains tiny compared with total deposits in the Chinese banking system, this

migration of cash from banks to the Alibaba platform is only speeding up.

In the process, it threatens to upend the rules of China’s state-protected financial sector, eroding

banks’ profit model and shifting power to savers in a way that was scarcely imaginable at the start of

this year.

Other Chinese tech companies are getting in on the act. Tencent, developer of the hugely popular

messaging app WeChat, is said to be designing a fund platform similar to Yu’E Bao. Baidu, the search

engine company, began marketing investment products in October.

“Internet companies, with their ability to instantly reach millions of consumers, have already started to

subtly change the competitive dynamic in finance,” says Ernan Cui, an analyst with GK Dragonomics, a

Beijing-based research firm.

Some see it in even starker terms. “This could be a game-changer. It is the biggest threat to the low-

and middle-income customer base of banks,” says an analyst with an international bank who asked to

remain anonymous as he was not authorised to speak to media.

Richer customers have already started shifting their funds into banks’ wealth management products,

which offer much better returns than regulated deposit accounts but have high minimum investment

thresholds. With Yu’E Bao, users can invest as much or as little as they want.

Moreover, just like demand deposits at banks, users can withdraw their money from Yu’E Bao

whenever they want. But while demand deposits earn an annualised rate of 0.35 per cent in banks –

a level capped by the government to ensure that banks have plump profit margins – Yu’E Bao rates

have averaged about 5 per cent over the past month.

Little wonder that it has drawn such rampant demand. Launched in June, Yu’E Bao has in short order

become China’s most successful money market fund. As of last month it had raised Rmb100bn, the

first to reach that milestone.

Behind the Yu’E Bao brand name stands Tianhong Asset Management, in which Alibaba bought a

majority stake in October. Tianhong invests all the Yu’E Bao cash in money market funds, mainly

consisting of interbank loans and some short-term debt securities, according to analysts. So the cash

still largely ends up with banks, but rather than paying a government-controlled rate for it, they pay

whatever is the going market price for money.

It is, in other words, ushering in interest rate deregulation in a big way. This week’s spike in Chinese

interbank rates in part reflects the growing competition for deposits. Given that regulators have been

loosening their grip on interest rates but want to proceed in a gradual manner, the success of Yu’E

Bao and other internet-based money market funds poses a big challenge to that strategy and could

yet invite more scrutiny.

“The banking network will always have its place in the financial architecture, and the government will

keep its hands on it, so I don’t think it will let Alibaba become a huge threat. It will be more of an

addition,” says Billy Leung, an analyst with the RHB Research Institute.

Alibaba downplays the challenge Yu’E Bao poses to banks. “The users that our platforms are serving

may not necessarily overlap with those that are being served by the traditional banking and financial

services industry,” says Alipay, Alibaba’s online payment system.

But in recent days Alibaba has launched an aggressive marketing campaign, plastering subway stations

in Shanghai and Beijing with ads that leave little doubt the company has banks in its sights.

“The Yu’E Bao annualised return is nearly 14 times higher than the demand deposit rate,” the ads

blare. “It’s a wallet that makes you money.”