China's Online finance platforms start to struggle

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Cracks are starting to show in the once impervious armor of China's online finance platforms as yields have dropped 20% from their highs. Ranging from about 4.7-5.6%, the current highs are much lower than the 6-8% that we saw at the end of 2013 and beginning of 2014.


China's online finance platforms facing headwinds

Realistically though, this isn't surprising. As we have discussed before, these platforms were running on borrowed time. Whilst the business model made sense, the inter-bank lending rates and the negotiated deposits that the main China online finance platforms were able to negotiate were a bit of a perfect storm for the platforms.

Now as the banks have put limits in place on the amount of money that can be moved on and off the platform at any one time, we're starting to see the market's reaction to what has caught most banks and the regulators completely off-guard. This is unlikely to be the last push-back from the banks on these new financial products. 

Unclear Regulation

Yet the platforms still have over 1.45 trillion yuan (US$230+ billion) on their platforms and this is unlikely to rapidly decrease anytime soon. 4-5% is still much better than the average retail consumer could get on a bank demand deposit in most of China's main banks and the convenience can't be beat - very easy to get money on and off the platforms, although within the limits set out by the PBOC.

This is far from the end of the story thought. We expect the growth of the platforms to certainly slow and although its still a bit unclear as to what the regulation will be, further regulation and requirements from the PBOC is inevitable as we go forward in 2014. This is all the more critical as Alibaba moves forward on the IPO plans. Can the company count on that part of the business to still drive revenue?

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