In 2013, banks’ current account deposit interest rate was 0.35%, while the average annual return of money funds in China was 4.27%, almost 120 times as large. Because of the higher return as well as the accessibility that the internet offers, individual investors are piling into money funds. Take Alibaba’s Yuebao as an example. In the one month after it was launched in June 2013, Yuebao accumulated billions of RMB in assets under management (AUM) and has had an even larger growth in the first few months of 2014. As of January 14th, the size of Yuebao reached 250bn RMB. In February, the size of Yuebao even broke through 500bn RMB and its registered users reached over 80 million individuals.
The huge increase has started to alarm banks as it represents a threat to current deposits and is starting to also affect term deposits and financial capital. The latest data from PBOC has shows this influence from money funds. It showed that in January 2014, the outflow of banks’ deposit was 940.2bn RMB. At this point, the continued growth of money funds has started to frighten banks a bit. In this situation, banks started to fight against Yuebao, etc, by rolling out internet financial products and some banks started to establish money fund projects. Currently there are at least 8 banks involved in rolling out financial products that are similar to Yuebao.
In addition to the push-back from banks, China's online finance challenges also come in the form of them facing media critics. Yuebao was even labeled a ‘vampire’ and is suggested to be banned by Niu Wenxin, the chief editor of CCTV Finance, on February 21st, 2014. On the same day, the China Securities Regulatory Commission (CSRC) and Fund Management Companies made an appeal to supervise money funds. The worst comments were from the conference held by China Banking Association (CBA) on February 25th. The purpose of the conference was to discuss self-regulatory codes on Banks’ deposit. It is suggested that 1) the deposit from money funds is integrated into general deposit management rather than interbank deposit and is required to pay required deposit reserve rate; 2) to comply with the relevant regulatory requirements, the interest rate ceiling performs 1.1 times of the benchmark interest rate in the same grade; 3) if withdrawing in advance, the interest rate is paid at the rate of a current deposit or to pay penalty interest.
From CBA’s meeting with its members, Kapronasia thinks that if deposit from money funds are integrated into general deposit management, the returns of Yuebao will drop substantially and the attraction of the funds will be far behind banks’ financial products. It is known that 92% of Yuebao’s capital is reinvested in interbank deposit, which don’t need to pay 20% required deposit reserve rate and enjoy preferential policies of withdrawing in advance without paying penalty interest. However if the clause is effective, some experts estimated that the return of Yuebao will drop at least 2%. Customers that are used to the annual returns of 6% from Yuebao, may not be satisfied with only 3%-4%. This may cause a substantive redemption.
We also notice that whether deposit from money funds are integrated into general deposit management is determined by PBOC rather than CBA. However, CBA’s meeting with its members to some extent has reflected banks’ voices on regulation on money funds. Although, PBOC currently hasn’t make any announcement on the regulation of money funds represented by Yuebao, it may take some measures. Thus, we suggest focusing on the movement of PBOC in the coming days.