“Yuebao,” which literally means “leftover treasure” in Chinese, is the name of a new financial service that made its debut in China last year. It has succeeded in collecting money from individuals in excess of ¥8 trillion and has become a threat to major state-owned commercial banks like the Industrial and Commercial Bank of China. This service, operated by China’s biggest e-commerce firm Alibaba Group, could open a crack in the Chinese economic system that has long been controlled by state-owned businesses and eventually imperil Communist one-party rule.
This service works this way: In China, where credit cards are not commonly used, Alibaba Group created a purchase settlement system known as Alipay, in which consumers deposit their money to pay for purchases made online. Since Alipay does not pay interest, people usually transfer the unused portion of their deposits to Yuebao, which in turn uses the money for short-term investment, paying depositors annual interest rates of around 6 percent — far exceeding that paid by banks.
Following the start of its service in June 2013, Yuebao’s operations grew by leaps and bounds, collecting 500 billion yuan (about ¥8.1 trillion) from 86 million customers as of mid-March. The deposits are said to be still growing at more than 5 percent per month.
It is perfectly understandable that the general public is attracted by the high 6 percent interest being paid by Yuebao. Ordinary banks, under strict government control, are allowed to pay only 0.35 percent per year for savings accounts and up to 3.3 percent on one-year time deposits.
A review of the Chinese economy during the past six to seven years would explain how this gap in interest rates has come about. During those years, the most important factor behind economic growth was investment in infrastructure like expressways, airports, railways, office buildings and condominiums.
After it became difficult for the central government to finance these projects that were expanding, the Communist Party started asking local governments to invest their money, because large infrastructural projects were indispensable for maintaining rapid growth.
China succeeded in overcoming the after-effects of the Lehman Brothers bankruptcy by investing 4 trillion yuan (¥57 trillion at the then prevailing exchange rate). Two-thirds of that sum was shouldered by local governments.
But there was a limit to the money that local governments could raise or borrow. So they resorted to an unconventional means of securing funds by establishing a large number of investment firms to sell high-return wealth management products.
This is what became known as “shadow banking.” State-owned commercial banks came to buy high-return WMPs from other financial institutions while, at the same time, issuing their own WMPs on the strength of their high creditworthiness. The interest rates on their WMPs are about 6 percent while those offered by other financial institutions’ WMPs have exceeded 10 percent. State-owned commercial banks can make profits by taking advantage of the interest rate difference.
This development has embittered resentment among ordinary citizens who earn only low interest at their banks and caused them to rush to buy Yuebao as “revenge” against major banks.
The money that Alibaba Group has collected by selling Yuebao is lent through its group firm to state-owned commercial banks, with interest rates as high as those of WMPs offered by banks. This scheme spares major banks cumbersome tasks of collecting small sums from ordinary citizens and at the same time minimizes Alibaba’s risks because its loans are extended only to the four large state-owned commercial banks.
In the short-term money market for Chinese banks, Alibaba is serving as a supplier of funds. A fear is surfacing among the banks that their functions might be taken over by Alibaba if the Yuebao service expands.
Indeed, the China Central TV branded Yuebao as “the vampire of society” on its financial news channel in mid-February. It blamed Yuebao for pushing up the banks’ costs of procuring funds and imposing high interest rates on borrowers while Alibaba is making large profits with ease.
But the Chinese leadership appears to be giving tacit approval to the scheme being promoted by Alibaba Group, as Premier Li Keqiang told the National People’s Congress in March that he would support healthy development of Internet banking. This was echoed by Zhou Xiaochuan, governor of the People’s Bank of China, who said the present state of online money funds should not be subject to government control although their management system needs to be reviewed.
The government apparently cannot take tough action against Yuebao for fear of a strong public backlash. Stock prices in China have stayed sluggish with the composite index of the Shanghai Stock Exchange now at about a third of its peak level. Individual investors do not trust information released by corporations, while slower economic growth and excessive production capacity have drastically worsened corporate profitability with no recovery in sight.
With bank interest rates kept low, Yuebao has become the most attractive target for investment, prompting one insider to comment that a closure of online money funds like Yuebao would trigger an uprising among the masses.
The total amount of money deposited with Yuebao and other online money funds accounts for only 1 percent of the total deposits from individuals in the hands of the four major state-owned commercial banks, which come to 74 trillion yuan (about ¥1,220 trillion). This is why the Chinese leadership sees little possibility of such funds disturbing the financial order of the country. It feels, moreover, that it would be to its advantage to permit those funds to operate as a way of quelling dissatisfaction among the public with low interest rates and bad services by major banks and as a way to restrain the four major state-owned banks, which have become so powerful that it has become difficult for even the Communist Party leadership to control them.
Not only Yuebao has been increasing its assets. Similar wealth management funds have been launched by Tencent QQ — Alibaba’s archrival — which operates social networking services like Weibo and WeChat. Moreover, with Baidu’s entry into the market, the largest search engine service, the online money fund business is beginning to offer big opportunities to Internet companies.
A Chinese financial expert has said that with the public support for high interest rates and the convenience offered by these services, more than 30 percent of the money deposited by individuals in major banks could be shifted to online money funds within three years. Furthermore, the state-owned banks would have to rely more heavily on Yuebao and other online money funds sources to meet their needs because it has become increasingly difficult to collect deposits from ordinary citizens. This could give rise to a scenario in which the online financing will occupy a major position in China’s financial system.
This could lead to a collapse of the Communist Party’s high-growth strategy of investing in infrastructure and capital equipment with funds supplied by state-owned commercial banks to local governments and leading state enterprises, despite the poor prospects of recovering such investments. Yet, the party’s decision to ban the likes of Yuebao would only lead to public resentment.
The two socialist giants — the former Soviet Union and today’s China — expanded their economies with a “priority production system” of investing money collected from farmers and workers in the heavy and chemical industries.
The Soviet system failed because not enough money was invested to produce consumer goods while China has so far been able to maintain high growth with tactful use of financial services. But the rise of Yuebao and other rational financial services meeting the market principle is challenging the past policies of depending on state enterprises and unnecessary infrastructural projects.
Yuebao and other newly emerging financial services are confronting the Communist Party with the fact that financial services are the very tool that restores the soundness of the economy.
This is an abridged translation of an article from the June issue of Sentaku, a monthly magazine covering Japanese political, social and economic scenes.