Fast & Furious： Alibaba’s “hidden treasure” is growing fastPosted on March 25, 2014
Dealing with banks is never fun anywhere. Dealing with a Chinese bank however is usually even tougher. So it is no surprise that Alibaba has had a huge hit with Yu’E Bao, a money market product that is causing all sorts of consternation with the banks whilst sucking in billions of RMB in deposits for Alibaba each month. But what is Yu’E Bao? Is it worth using? Why are the banks worried? And what will likely happen?
Yu’E Bao is a money market fund sold by Alibaba and managed by Tianhong Asset Management. Yu’E Bao is simple to use and simple to get. You can buy Yu’E Bao on your smartphone. And it offers an annual interest rate of around 6 percent, but with daily access. Yu’E Bao’s money market funds invest for up to three weeks in “cash-like” things such as cash deposits. They also buy things called repurchase agreements, which are cash-like investments, and can use up to 10% of the fund to buy short term corporate bonds.
Yu’E Bao’s speed and ease of use far surpass that of banks. This, combined with an interest rate far higher than what banks can offer, has made Yu’E Bao a massive success. Within 9 months it is has come from zero to 250 billion RMB in assets under management and is already one of the 15th largest money market funds in the world. Though Yu’E Bao’s is exploding in size, this new money market fund only has 1 percent of the cash deposits the Chinese banks have.
Chinese banks are protected petals, guarded from foreign and domestic competition by a never-ending labyrinth of red tape. These large financial institutions aren’t used to competition. But Chinese banks have recently faced growing pressure from the central government to make lending more “market based.” This is code for: base loans on the business case rather than personal influence. Banks and products shouldn’t be guaranteed to ensure that fewer, wasteful or corrupt loans are made. A noble aim although a difficult one. Alibaba and Yu’E Bao’s success is just rubbing a hand-full of salt into this opening wound. Needless to say the Chinese banks are fighting back.
To be fair, the banks have some worthy points. Their claim that Yu’E Bao’s growing market power could lead to Tianhong and Alibaba making investment decisions that bankrupt a regional bank has validity. There is also a morsel of fact in the speculation that Yu’E Bao could be withholding cash before certain dates (like Chinese New Year and quarter end), leading to spikes in interest rates to increase its returns. These spikes are de-stabilizing to the whole financial system. Yu’E Bao’s response that it still only has 1 percent of cash deposits isn’t that strong either, since many banks often stand only a few percent of deposits away from illiquidity.
Yu’E Bao also has risks for its investors. It offers daily liquidity yet invests for 2-4 weeks, thus being vulnerable to the fund-equivalent of a bank run. Yu’E Bao isn’t a bad product, but this mismatch could lead to problems one day, so this product is for smaller sums and not for life savings, despite its decent returns and ease of use.
In this environment, there are two main potential outcomes. The first is that the government finds a way to hobble or cap the success of Yu’E Bao (the government doesn’t’ like power bases outside of state control). The second likely outcome is that Yu’E Bao has liquidity problems and leads to a collapse of a small regional bank in China, probably leading to a bail-out. Either outcome could mean the fund’s death.
We like Alibaba and the fact they have stuck it to the banks. These easy-to-use financial products are highly needed in China. The Chinese government would do better to fix the Yu’E Bao product and change the terms to access available after 7 days notice, rather than daily liquidity. Liberalization of the bank’s interest rate would also help.
This article was posted on Home & Office Spring 2014 edition of Cityweekend. You can also find the article here.
About Caterer Goodman Partners
Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients’ interests.
About Owen Caterer
Since graduation Mr Owen Caterer has worked with the Queensland Premier's Department in Trade Facilitation and then as a financial adviser in Shanghai from 2005 until 2010. He then rose to Senior Adviser, then Business Development manager and then to Chief Investment Officer responsible for portfolios to a value of US$280 million across Asia. Following that Mr Caterer left to found his own firm with a partner in the financial advisory and wealth management area. This focused on developing China and Asia's first fee-based financial advisory (rather than commission-based). This has grown to now have 8 staff and and managing almost US$35 million for clients throughout Asia. This business success was recognized as a finalist in the 2013 ACBA in the Start Up Enterprises category and are one of a small number of foreign managed firms to have a full asset management license in China. Owen has also been active in the community volunteering for the Australian Chamber of Commerce in Shanghai and acting as the Vice-Chair of the Small Business Working Group (2012-2014) and as the Co-Deputy Chair of the Financial Services since 2013 until the present. They have continued to grow their business and have now been selected as a small group of companies who are platinum members of the Australian chamber of commerce. The achievement they are most proud of is their efforts to reform the financial planning industry in China and push it away from a hard-sales commission driven model to a more ethical management fee and long term customer service model. Owen has a Graduate Diploma of Applied Finance from the Securities Institute of Australia of which he was a member as a Fellow of Finance for many years and also has an undergraduate degree from Griffith University in International Business. Owen's interests are tennis, running and his wife and two children. He speaks fluent Chinese, first arriving in China in 1997.
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