Big Chinese Internet Companies Are Competing Head-On Against Chinese Banks

Published on Author bloomer


In recent years China has seen an increase in wealth management products. This has been a result of the country’s restrictive financial system that offers limited investment techniques for the growing population of wealthy Chinese. These new wealth management products have on average a yield that is two percent higher than what bank deposits offer. Banks currently have a ceiling on their deposit rates and many have called for the liberalization of interest rates. Until this happens, households will continue to look for new investment avenues that increases returns on their money.

Internet companies are looking to capitalize on the wealth management void. For example, Alibaba affiliate, Aliplay, offers Yu E Bao, “an investment product created by Beijing-based Tian Hong Asset Management Co, that places investor money in funds.” As of the beginning of this year, Yu E Bao had over 250 billion yuan ($41 billion USD) in investments from around 50 million investors, making it the 14th largest money market in the world, according to Tian Hong.

3 Responses to Big Chinese Internet Companies Are Competing Head-On Against Chinese Banks

  1. As we know the availability of cheap money for the banks has come in limited supply in money tight China. Banks then loan out funds for a premium some of those loans are then loaned out again. The shadow banking market is risky because cash get tied up and smaller banks have not had the liquidity to pay off debts. While profitable for banks regular people are not being encouraged to save due to the low rates. Moreover those alternative products with higher yields are marketed as safe investments and consumers are not properly informed about the increased risk.

  2. As these internet companies are entering the investment industry, it is interesting to think about the regulation of interest rates. If China chooses not to liberate interest rates, how much will this limit the types of securities one can buy? Moreover, how much will this market grow if these regulations remain static? If I had to guess, China will become more liberal as time progresses because they will see the opportunities and economic growth if they do.

  3. Yes, it is difficult to maintain financial regulation – including negative real interest rates for depositors – in the face of new entry. This happened in the US in the 1970s, where the initial straw was the creation of Money Market Mutual Funds that allowed small savers (such as myself) to investment in instruments that earned normal market returns (at one point the differential with a bank account was over 10 percentage points, 1000 basis points). As time goes on we should see more and more examples of such new products on the fringes of the formal financial system, which as we noted in class is only about 20 years old. Think about it: no senior manager in a Chinese bank likely has had any experience actually making loans, they’re all still people who came out of the old “monobank” system and from the Party hierarchy. Not that professionalism necessarily leads to sound banking, as we’ve unfortunately learned in the US.