Alibaba Group Holding Ltd., China’s Internet giant, has been diversifying its business exposure from a pure e-commerce provider. The company broke into the financial sector years ago by creating an affiliate called Small and Micro Lending Group, which offers loans mainly to China’s small and medium enterprises. Another attention-grabbing initiative was the inception of Yu’e Bao, which means “leftover treasure” in Chinese.
So what exactly is Yu’e Bao? It is a money-market fund originated from Alipay, Alibaba’s electronic payment system. With Alibaba’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. More surprisingly, the surge was done in just eight months.
Yu’e Bao was launched in June last year when China’s banking system was in the midst of a so-called “cash crunch”—state-owned banks were offering higher returns to attract funds and increase reserves after a surge of risky and untested credit growth. However, since the interest rate of a one-year fixed deposit was capped at 3.3% by China’s central bank and the Alibaba-backed fund initially offered around 6%, traditional bank deposits fell short of Yu’e Bao in the competition of liquidity.
Regarding the reason why it could offer higher yields than traditional deposits, it is attributed to Alibaba’s bargaining power with banks. According to the report of Tianhong, the third-party asset management firm in charge of the fund, more than 92% of the fund is invested into bank deposits because of its nature as a money-market fund. Since Alibaba is able to negotiate higher returns on deposits than what ordinary savors are obliged to accept, the yields for the fund’s investors are relatively higher.
Extensively speaking, Yu’e Bao’s popularity was derived from Alibaba’s credibility as a strong and trusted e-commerce provider. On the side of savors, the higher yielding fund offered better-than-deposit returns and convenience as well—savors can withdraw their funds whenever they like. On the side of Alibaba, the development of the fund would attract funds from online shoppers and ordinary savors, making it an extra money-making channel and a potential stimulus for consumption on the company’s online shopping sites, Tmall and Taobao.
In terms of the nation’s entire financial system, the fund has become an emerging power that is challenging those lumbering state-owned banks by pushing them to develop stronger risk management, diversify products offerings, and offer higher yields to savors in the process of interest rate liberalization.