The Yu E Bao e-investment product has been in the spotlight because of a strong backlash against remarks made by a CCTV commentator, who compared it to a vampire that sucks money out of banks.
Polls show the public supports the e-investment product, quite possibly because it promises quick returns and an annual yield that has so far been above 6 percent. That is more than banks offer for five-year term deposits.
Yu E Bao is an investment service launched in June by Alipay, a PayPal-like third-party payment company that holds nearly half of the country's market. It is essentially a money market fund managed by Tianhong Asset Management Co. By mid-February, it had grown to more than 400 billion yuan.
Alipay is owned entirely by Zhejiang Alibaba E-commerce Co., which was established by Jack Ma and Xie Shihuang. Both Ma and Xie are founding members of Alibaba Group, which owned Alipay before Ma arranged for its transfer to Zhejiang Alibaba, a decision that was opposed by Alibaba Group's foreign shareholders.
Is Yu E Bao a safe investment?
Investing in Yu E Bao is safer than trading stocks and bonds, but it is risker than depositing your money in a large bank. Tianhong lends up to 90 percent of the money in Yu E Bao accounts to 29 large banks, including the big state-owned ones.
Unless those banks default on a loan they took out from Tianhong, the investment is safe. But there is a liquidity concern, especially when banks are lobbying to have the terms of the loan agreements changed. That could force Tianhong to either cut yields or make withdrawals more difficult. In the worst-case scenario, this could trigger a run on Yu E Bao accounts.
How are banks defending themselves?
Banks are losing deposits quickly to Yu E Bao and other Internet investment products. Many have raised the yields of their wealth management products to keep clients. Some are trying to renegotiate agreements on interbank loans, which allow fund management companies including Tianhong to enjoy interest payments at a pre-agreed level even when money is taken back early.
Who regulates Yu E Bao?
No one knows. The central bank and the regulators of the securities and banking industries should all be concerned. The central bank oversees Alipay. The securities regulator supervises Tianhong and the funds it manages. The banking regulator must pay attention as well because banks play a key role in Yu E Bao investment.
Why did Alipay launch Yu E Bao?
It was the best way for Alipay's founders to keep it from falling into someone else's hands. Like all other third-party payment companies, Alipay is required by the central bank to have registered capital of at least 10 percent of the money it handles for clients on a daily basis. With Yu E Bao, users keep less money in their Alipay accounts, reducing the need for the firm to use outside investors to increase its registered capital, which would dilute the founders' holdings.
