Chinese banks are responding to competition posed by financial products launched by internet companies by introducing similar products, but the initiative has proven risky for banks, the China Securities Journal reports.
Following the success of Yu'ebao, a product that allows users of third-party payment service Alipay to invest value stored in their accounts in a currency fund, Chinese banks have begun introducing similar products for their clients, after many pulled money out of their deposits.
"Currently, most banks choose to work with their fund subsidiaries, meaning the funds that have been pulled out from the deposits are likely to return to banks. As long as a client stays with the bank, it is possible that he or she will invest in the banks' other products. If the client chooses products offered by internet companies, however, banks lose both the client and his or her funds," said Bank of Communications chief economist Lian Ping.
Banks might be able to retain their clients through their new products - mainly currency funds - but such a move is costly since they have to pay returns at higher rates than deposit rates, the newspaper said.
Wen Bin, researcher with the Bank of China's International Macroeconomic Research Institute, added that the rise of online financial products would have a major impact on banks' business models and profitability because of the growing costs.
The portion of demand deposits in the total deposits of businesses and individuals had dropped from 50.2% to 39.2% over the past three years, according to Wen.
If the migration of funds from deposits to internet financial products continues at this kind of pace, banks will see costs increase by 100-200 billion yuan (US$16.4-$32.7 billion) a year, Wen said.
The rapid expansion of currency funds in China has caught regulators' attention, as redemption of funds requested by investors on a large scale might create risks when liquidity is tight, the newspaper said.
The newspaper stated, however, that efforts made by banks in response to online competition showed that the banking sector is preparing for market liberalization, which will see rapid progress.
Industry insiders are of the view that a high return on currency funds is likely to return to a lower level once the market starts operating under a more mature mechanism.
