Yu'ebao boosts capital supply for economy in China

Yu'ebao, a popular online wealth management product, will boost funds available for in the real economy, rather than raising financing costs, an official report showed on Monday. The product is a way of collecting small amounts of money from customers, when those small amounts enter the financial system, total funds available in the real economy are raised, according to a report for Xinhua by the Ali Small and Micro Financial Service Group, a branch of e-commerce firm Alibaba, owners of Yu'ebao. Yu'ebao, which literally means "account balance treasure", was put online by third-party online payment platform Alipay in June to help customers "manage excess funds in their Alipay accounts". Users can easily transfer their account balance into Yu'ebao, which links to a money market fund run by Tianhong Asset Management Co. The product has won great popularity among Chinese people, as it is as convenient as demand deposit and the yield is much higher than China's benchmark one-year deposit rate of 3 percent at present. It has more than 81 million users with capital raised reaching 500 billion yuan (81.5 billion U.S. dollars) by the end of February. The report was the first official response to an accusation by CCTV commentator Niu Wenxin, who said late last month that Yu'ebao is like a "vampire" as it will raise the capital cost of commercial banks and subsequently increase the financing costs for enterprises. Online fiance products like Yu'ebao invest heavily in the interbank market, lending most of their funds from individuals to financial institutions at higher rates than individuals can get for bank deposits. The financing cost of companies is determined by the demand and supply of capital, not by commercial banks' cost of getting deposits, the report said. "Prior to the creation of Yu'ebao, commercial banks never lowered their lending rates because of their low cost for accepting deposits," it said. The statement also said the popularity of Yu'ebao helped other financial institutions realize the advantages of online finance and steered wealth management market toward healthy competition, which brings tangible benefits to clients. Yu'ebao will promote market-oriented interest rates and help the financial system form a equilibrium interest rate, according to the report. Shu Ming, chief strategist of the Ali Small and Micro Financial Service Group, said Yu'ebao will also help financial players change their mindsets and boost their innovation capabilities. "Previously, government control over interest rates gave banks a privilege to make easy profits. The appearance of Yu'ebao will break their monopoly to some extent," Shu said. At present, commercial banks are required to implement deposit and lending rates announced by the central bank. China will not ban Internet finance, but will improve regulations in the area, central bank governor Zhou Xiaochuan said last week at the ongoing annual sessions of China's national legislature and political advisory body. "China encourages technological applications in the financial sphere," he said. The words came as a great relief for managers and investors of Yu'ebao and similar financial products, who had worried about policy uncertainties. The government work report delivered at the sessions also said that China will promote the healthy development of Internet finance and improve the mechanism of financial supervision and coordination.