Zhejiang Alipay E-commerce, the online payment arm e-commerce giant Alibaba Group, took another bold step into the financial sector earlier this month – hopefully one in the right direction.
In a purchase that surely turned heads at Chinese banks, the company announced on October 9 that it would take a majority stake in Tianhong Asset Management, a provider of financial services on the mainland. It said the US$192.7 million deal would help it provide security and innovation on its way to becoming a player in the financial industry, a track Alibaba has charged since June when it opened an internet finance outfit.
Traditional banks, however, may view the buy-up as a siege on a sector long guarded by the state. Particularly troubling to both regulators and state banks is the competitive return Alibaba’s online finance operation, known as Yu’E Bao, offers on deposits while traditional financial institutions are stuck at a government-set rate.
Big banks aren’t sweating yet, though. While the regulatory jury is still out on how to handle the private push into internet finance, some of China’s biggest financial players are preparing forays of their own into the digital ether.
The results from an inter-ministerial investigation into internet finance, called the biggest probe of its kind to date, threatens to bury much of the rapidly expanding industry in paperwork and red tape.
In the spotlight
And expanding it is. Several well-known private companies have pushed into the online financial space before the government has found time to draft a strong set of industry guidelines. Alibaba, Baidu, Qihoo 360 Technology, Tencent Holdings, and even the electrical appliance retailer Suning are just some of players that have either opened online finance shops or aspire to.
Alipay launched an online fund called Yu’E Bao on June 14. The service is ambitious but could attract some regulatory scrutiny. Customers that put money into Yu’E Bao can earn an annual forecasted return of 3.8% on investments as opposed to the 3.5% rate fixed by the government at traditional banks.
That fund will put its investments into competition with bank deposits. People’s Bank of China (PCOB) liberalized interest rates on loans in June but has held steadfastly to its control over deposit rates. The financial industry is still waiting on that final reform, that would introduce a market mechanism for deposits and force banks to compete for depositors.
Alibaba is stepping around that reform, at least for now. Regulatory oversight that spans seven different bodies could take issue with the fund.
In August, the State Council called into the room PBOC, China Banking Regulatory Commission, China Securities Regulatory Commission, China Insurance Regulatory Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security and the Legislative Affairs Office.
“The size of the undertaking indicates the importance placed upon the industry by regulators, as well as their expectations for rapid sector growth,” Shanghai-based Z-ben advisors said in a note in August.
A needy niche
A heavy-handed push against internet financiers such as Alibaba seems in the cards. Still, the government has good reason not to stamp out the green shoots of the industry just yet.
Internet finance will largely focus on providing capital to a segment of the market big banks have long ignored.
“Internet companies will enter into a few niche market and will prevail in small and medium enterprises lending,” Ning Zhu, a professor at Yale and the Shanghai Advanced Institute of Finance, said in an email on Thursday.
China’s new administration under Premier Li Keqiang has recognized the importance of feeding entrepreneurs and the private sector with credit. A shortfall in that segment of the market birthed a massive shadow banking market four years ago where capital-starved businesses survive on high-interest loans. At the same time, big, state-backed firms have thrived while smaller industry has gone into retreat.
A July notice from the State Council has attempted to fight against those trends, promoting privately owned banks that would lend to small and medium enterprises. If reformers prevail at internet finance investigation, that industry too may find similar support.
David vs Goliath
Government backing aside, Alipay’s Yu’E Bao has quickly garnered attention from the people at large. Just two weeks after its initial launch, the online platform had 2.5 million customers transfer around RMB5.7 billion into the fund and within two months. Investment in Yu’E Bao had exceeded 20 billion yuan.
The success hasn’t gone unnoticed. Industrial and Commercial Bank of China (ICBC) is one of several institutional giants to announce it was wading into the market. The bank plans to launch an internet finance platform but has yet to reveal any details on the project.
Competing directly with state firms, especially with the likes ICBC, the world’s biggest bank, seems a daunting task for private firms. Despite the positive reaction from the market, private internet finance could find itself mired in regulation if it steps too far into the territory of government-controlled banks, an area unfamiliar with market rule.
“[It’s] promising but risky,” Zhu said on the prospects of the industry. “As internet finance companies grow, they will face increasing regulatory scrutiny, which increase the compliance costs and cost of capital.”
The results from the State Council’s investigation will be telling, not just for the future of online financing, but for the life of private business in China and the caliber of real reform currently underway. No one is waiting in earnest more than the leaders at Alibaba, who have pushed ahead with huge purchases such as Tianhong AMC despite the high risk.