The Challenges of Alibaba’s Yu’e Bao

In my previous post, I discussed the development of Yu’e Bao, a money market fund controlled by Alibaba. With the company’s leading position in e-commerce and the strong client base, the fund tripled in size during the first quarter with a total of 541.28 billion yuan under management in comparison with 185.34 billion yuan at the end of last year, making it the fourth largest in the world in terms of asset value.

Nevertheless, I think there are three main challenges behind the gorgeous achievement.

First, the yield is decreasing. Since the Chinese central bank has been engineering a decline in the Chinese yuan by purchasing the US dollar and increasing the daily trading band of the yuan, interest rates are expected to decrease in the near future. Although Alibaba is able to negotiate higher returns on deposits than what ordinary savors are obliged to accept, the declining interest rates would pose potential risk to the money-market fund. A signal is that the rate fell to around 5.5% now from its peak of 6.8%. Considering the fact that more than 90% of the fund is invested into bank deposits, further slides on return might be inevitable.

Second, traditional banks are fighting back with diversified wealth management products. Those state-owned banks fell behind Yu’e Bao in the competition for liquidity because the rate of a one-year deposit is capped at 3.3%. Nevertheless, they are bypassing the deposit requirement by offering the so-called “wealth management products”, which is just another channel of financing. Basically, they offer higher-than-deposit rates on financial products sold to the general public and then charge even higher rates on lending to government-led investment projects. The return in this scenario tends to be 5%, a level similar to Yu’e Bao’s.

Third, Yu’e Bao will have to face stricter regulation. There have been concerns that a significant portion of the fund flows into untested and unregulated investments eventually, threatening the stability of the overall financial system. People’s Bank of China Governor Zhou Xiaochuan said recently that while the central bank wouldn’t “crack down” on the products, it would improve regulations. Furthermore, since state-owned banks have dominated the nation’s financial sector for years with profoundly political influence, the regulatory authorities might be forced to curb any emerging power just like Yu’e Bao for protection of traditional banks’ profitability.

In terms of Yu’e Bao’s future, I believe there will still be great opportunities down the road because of its private capital nature and the ongoing financial reform in the country. Ordinary Chinese people have limited investment channels, so the promising Yu’e Bao could be a favorable complement to bank deposits and therefore increase their wealth level, an accomplishment in line with the government’s goal of boosting domestic consumption for economic growth.

One thought on “The Challenges of Alibaba’s Yu’e Bao

  1. zhuwei

    I agree. Yu’ebao is undergoing a lot of pressure from the regulatory forces. I think that e-finance is serving more like a catalyst to the financial industry’s revolution in China. The government-centric financial system has lost its advantages. Yu’ebao is not the ultimate solution, but it’s definitely a step forward.

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