The cap on investment is a requirement from the PBOC (China’s central bank) and is expected to be in place at the end May at the soonest. More details, such as whether is only applies to new money, or includes old, are still to be determined. Yu’E Bao is part of the Ant Financial platform, which had no comment on the issue except “everything is running normally at Yu’E Bao.”
Yu’E Bao was launched four years ago as a simple investment function on Alipay, the dominant mobile payment app in China. From the start, Yu’E Bao provided “T+0” redemption, no minimum investment requirements, and “free transfer” between bank accounts and the fund for every single investor. Although it started charging 0.1% fee last October for transactions over certain limits, it is still popular because of the convenience and a much better interest rate than the traditional banks, which, according to Tian’hong Asset Management, the fund manager for Yu’E Bao, averaged 4% in 2016.
Due to its popular features, Yu’E Bao can be used as a superior bank savings product. As a result, it has brought pressure on banks regarding short term savings market. More importantly, Yu’E Bao’s popularity also caught the government’s attention. The PBOC has already raised flags on China's money market investment funds in 2014. The risk of runoff and potentially high volatility was mentioned regarding Yu’E Bao and other similar products. However, the users of Yu’E Bao kept growing despite the government’s concerns. At the end of 2016, Yu’E Bao still had over 300 million users and a total AUM of RMB808.3 billion (USD$117 billion).
The government has reasons to worry. The size of Yu’E Bao already influences China’s inter-bank lending market, where most of the fund is invested in. Also, if anything went wrong with Yu’E Bao, the impact would be felt across the whole market.
Considering all the factors, tighter control from the PBOC is not a surprise. It would come rather sooner than later too. Also, it were probably only a start to cap the individual investment amount in Yu’E Bao. There are other possible ways to bring tighter supervision, for example, requirement of reserve against money put in Yu’E Bao. No matter what comes next, closer watch and tighter control are coming after Yu'E Bao in the near future.