Debate on Internet wealth management heats up

Debate on halting or encouraging Internet wealth management as an innovation model of financing has heated up as war between emerging internet finance and traditional banks escalates in China.

The burgeoning Yu'E Bao-like online investment funds have won the hearts of more and more customers, which inevitably squeezes the strong existing market share of the conventional banks.

Latest statement released by Alibaba shows that the number of Yu'E Bao's users exceeds 81 million up to Feb. 27, a 20-million-increase in 20 days, with the average yield at 6.062 percent, much higher than the one-year deposit rate.

Alibaba's success prompted more tech giants such as Tencent and Baidu to follow suit. They rolled out similar deposit-like online money market funds soon, all with the character "Bao" which means treasure in Chinese, aiming to get a piece of the deposit pie.

Chinese are noted as world's most diligent savers. They were saving at a rate of more than 50 percent of the nation's GDP in 2012, the highest among major economies, according to the International Monetary Fund.

"Bao" funds products are posing a very strong competitive challenge to banks. "Although the amount of money online products have attracted is still small as a portion of banks' overall deposit base, it's very significant in terms of the speed at which they've grown," said head of a consultancy.

Statistics indicate that deposits in brick-and-mortar financial institutions dropped 940 billion yuan in January, losing much ground.

However, the brick-and-mortar financial institutions are not willing to stand still. A number of them, including the five state-owned commercial ones are striking back by developing flexible financial products to retain customers.

Eventually, the competition for deposits is expected to lift financing costs and crimp their profit margins. So banks are urging regulations introduced to curb on-line funds offered by internet companies.

Yu'E Bao-like products invest most of their funds in interbank deposits, which are not subject to the rate cap. But if internet financial products are treated as general deposits, then they would be less competitive.

Another concern was aroused by a commentator with CCTV who slams Yu'E Bao as "vampire" of banks and calls for an outright ban. "It creates no value and makes profits by dragging up the economic costs of society. By establishing expectations of high yields, (the funds) merely cause higher borrowing rates and tighter liquidity in the money market," he added.

Cai Esheng, former vice-chairman of China Banking Regulatory Commission, said that banks and Yu'E Bao funds should not act in opposition. "Banking is not omnipotent, each kind of institution has its own function. While Yu'E Bao is just one of the competitors in the financial market," he said.

"Yuebao plays a positive role in accelerating the liberalization of interest rates," Guo Tianyong, a professor of finance at the Central University of Finance and Economics, argued in a commentary in China Securities Journal.

"Regulators are trying to walk a fine line. They don't want to kill innovation that benefits consumers, but they also don't want deposit-taking activity that's completely unregulated," said an analyst at Barclays Capital.

Now internet financing has become an objective thing in the process of social development. While there are pros and cons, it's expected to have a positive impact as China is on the way of letting the market play a bigger role in the economy. And market-driven interest rates are expected to allow for more efficient capital allocation.

Innovations in private wealth management are welcomed, but they still should be under a watchful eye for safety sake.

China's securities regulator is working on rules to guard against risks in funds raising on Internet so as to better protect investors' interests and ward off systematic risks, according to spokesman for the China Securities Regulatory Commission.