Tag Archives: e-finance

Is E-Finance Moving Stock Market’s Cheese?

Within less than 9 months, Yu’ebao, the poster boy of e-finance products, has attracted more accounts than those in the China’s stock market. This mostly attributes to Alibaba’s (parent company of Yu’ebao) huge user base. At the same time, Yu’ebao’s convenience, high profitability and low entry barrier are also driving reasons to this success. Without doubt, the fast rise of Yu’ebao and every other e-finance product are surely disrupting the game of traditional financial markets.

This disruption has struck a few nerves. Naysayers state that e-finance, instead of revolutionize the finance industry, it is killing the industry. Or, in a more specific way, it is destroying the stock market by drawing cash away.

To these opinions, I disagree. The defeat of China’s stock markets and commercial banks wasn’t because of the disruption of e-finance, but because of themselves.

Due to the government’s interference, these traditional financial industries have long been unable to meet people’s expectation on profitability. The stock market was prosperous because there was no other option to make money. Now with the debut of e-finance, people realized there’s a much more profitable while safer way to invest. It’s only natural to see the disruption.

So it all comes down to the rate of return. If the stock market can perform better and produce a rate of risk/return at least neck to neck to the e-finance products, this “disruption” should stop. In fact, the 6% annual return of Yu’ebao isn’t that high for a financial product. It was only popular because of the low risk. This so called “e-finance revolution” reveals problems of China’s stock market: the return and risk are unpredictable.

Like it was mentioned above, this unpredictability was because of the government’s interference. Unlike it is in most developed stock markets where the primary function is to allow companies to raise capital for profitable investment opportunities, China’s stock markets, was created to recapitalize and restructure large state-owned enterprises that otherwise would have gone under. These state-owned companies, by nature, rely on state subsidies and governmental deals. That is to say, the growth of these companies depends on policy makers’ decision rather than the market. This is unpredictable to normal people. Since the stock market is driven by these state-owned enterprises, it inherits the unpredictability as well.

So who’s actually responsible for the disruption on China’s stock market? The stock market itself, and, of course, the government. After seeing two decades of unstable performance, people have realized the truth of the stock market. There have always been problems on the stock market system. E-finance only magnifies them to the public. Now with PBOC finally set its mind to make changes, let’s hope e-finance will survive and serve as a catalyst, too.

The Unstoppable E-Finance

The development of Internet and computer technologies has completely changed the world in the past 20 years. Now with social networking, cloud computing and mobile technologies, a seemingly unrelated industry is about to be flipped: the Finance industry. Different from the direct financing in the capital market and the indirect financing among banks, a new financing model, let’s call it the Internet Finance, or E-Finance, is about to take shape.

With the power of Internet, social networks and cloud computing, information becomes nearly symmetrical among trading parties; opportunity costs and cost of risks is minimized; all the intermediaries such as banks, brokers and exchanges are no longer needed; the distributing, trading and exchanging of loans, bonds, stocks and the alike can all be done directly online. The almost perfect market possesses the highest efficiency and the lowest friction.

Most importantly, the E-Finance makes finance no longer an elite game. Crowd funding, as a proud innovation of the magnificent Internet, has eliminated the barrier of entry to the finance market. Previously, publicly offered funds’ minimum investment was typically 1,000 yuan (approximately 165 dollars). By lowering the minimum investment to one yuan, the new online products have made the game playable by everyone.

In June 2013, Alibaba, an e-commerce company based in China, announced a new service named “Yu’eBao” (Remnant Treasure), which allows customers to invest money parked in their account at Alipay, its online payment service. The innovation has since created storm in the banking industry as it offers its customers higher return at a similar risk. The fund can offer an annual return of 3.8 percent, comparing to 0.35 percent interest rate offered by banks. In the meantime, customers can use their money to purchase online or pay bills through Alipay as usual. The interest rate and flexibility immediately attracted one million users in just one week. Up until March 2014, 65 billion dollars has been attracted into the fund, whereas banking deposits fell by almost 150 billion dollars in January.

Unable to stop the loss in their cheapest funding source, deposit, because of the government-set interest rates on comparable deposits are fixed by the government at 0.35 percent, bank executives are calling for more regulation. They state that the lack of oversight on the Internet Finance is threatening China’s financial stability.

However, despite how much the naysayers criticize the Internet Finance, A survey by the China Youth Daily newspaper, which drew 10,234 respondents, indicates that 85% of people had put money into E-Finance products. Among the rest, two thirds are planning to divert some of their bank deposits into E-Finance products as they sought higher returns and greater convenience.