Chinese Chat Money Markets See Interest Rates Surge and Then Plunge; Chinese Chat Programs Have Money Market Funds?

First, an introduction to Chinese online funds. If you didn't know, the online marketplace company Alibaba (the Ebay+Amazon+B2B marketplace), Sina (owner of China's Twitter, Weibo), Baidu and WeChat (part of Tencent, which is China's social networking/chat juggernaut) now offer investment funds for users. Alibaba's grew out of allowing customers to use idle cash in their Alipay accounts, a service that is possible thanks to banking and financial sector reforms. Seeing the success of Alibaba's product, competitors have joined the fray.

How successful is Alibaba's Yu E Bao? It launched in June 2013, a mere eight months ago, and one of its funds is now the 14th largest money market fund in the world, with more than $40 billion in assets. Let that sink in for a moment.

Tianhong's Alibaba mutual fund grows to second largest in China
Tianhong Asset Management, the sole partner of online giant Alibaba in the sale of money market funds on the company's e-commerce platform, is on its way to overtaking China Asset Management to become the mainland's biggest mutual fund manager.

But rivals may already be waiting in the wings.

Tianhong's total assets under management now stand at about 260 billion yuan (HK$330.7 billion), and the upstart could soon surpass the industry's long-time leader, China Asset Management - which oversees about 306.1 billion yuan - thanks to the growing popularity of online shopping.

China Asset Management has been the country's biggest asset management firm since 2007.

"Tianhong's success is not the end of innovation but a beginning, to look at the combination of investors and distributors in China and how such an online distribution model could be applied to more specific products," said Howhow Zhang, head of research at Shanghai-based consultancy firm Z-Ben Advisors.

"The success of such an initiative would depend on what kind of scale you could achieve, since this is a low-fee business model."

Tianhong charges only a 0.3 per cent management fee for its money market fund, a fifth of the 1.5 per cent on average that a mainland equity fund manager charges.

In June, Alipay, Alibaba's e-commerce payment platform, and Tianhong developed a new funds and payment platform called Yu E Bao, which translates as leftover treasure, that allows Alipay customers to convert the idle cash in their accounts into units of a money market fund.

By Friday, the fund had grown in size to 250 billion yuan, making it the largest single mutual fund product in China and the 14th-largest money market fund in the world, according to Tianhong.

......"We have over 100 trillion yuan of cash sitting in the Chinese banks generating almost nothing … it would be inevitable to have intermediate internet services in China trying to tap those massive savings," Zhang said.
To put that in perspective, imagine Google or Paypal offered a money market fund that in less than a year, collected more assets than say, Blackrock or Vanguard. Not going to happen in the U.S. due to having deep and developed financial markets, but the speed at which change is happening should give pause to both bulls and bears on China.

Yu E Bao Deals with the Pressure of Being No. 1
Caixin: How do you allocate funds from Yu E Bao?

Wang: About 80 to 90 percent of the money from Yu E Bao accounts will go to interbank deposits and the rest to safe bonds. Interbank deposits are banks' wholesale businesses with each other. The demands are vibrant.
We allocate investments and match maturities based on data analysis. At different stages a bank's ability to take deposits varies. On one hand, there are banks that can only take, say, 10 billion yuan, but we have 11 billion yuan that needs to be taken care of. That is when we hit the limit of their deposit-taking ability. We can deal with other banks or lower the interest rates we charge. On the other hand, a larger size brings greater negotiating power. We can ask for higher interest rates.

We pay the most attention to liquidity management. So far, we have seen a net increase in Yu E Bao investment. That means we face the pressure of finding investment opportunities for new funds every day.

Do you often get higher interest rates from small banks?

That is generally the case, but large banks may offer higher rates if they are caught short of cash. This is a matter of less concern to Yu E Bao because we limit our investments to only 29 banks that are on our white list. We don't venture outside the list. Most of those banks are state-owned or large joint-stock banks. We think it is not worth the risk dealing with small banks. It is not that we think they would actually default on loans. But we would like to avoid the risk altogether to be prudent.

There are many wealth management services similar to Yu E Bao. What is the strength of Yu E Bao?

First, the core value of our team is prudent wealth management. We have placed risk control in the highest place. Second, Yu E Bao operates on Alipay (the third-party payment service run by e-commerce giant Alibaba Group). It is connected to more than 49 million ordinary people and retail investors. That makes it particularly deep-rooted in society. Third, it brings the function of money market fund investment and payment together. The user experience is good. There are, of course, other funds being developed with a payment function. But we have been at the frontier.

What is the impact of interest rate changes on Yu E Bao? Some people say Yu E Bao's yield will stop rising. What is your view?
The yield of Yu E Bao goes with the cost of capital in the market. In December, there was a rebound in money rates, and the yield of Yu E Bao also increased. When money rates were low, the yield of Yu E Bao was low as well.

We will try to repay investors with moderate returns on investment. If the money market goes weak, it is normal for our yields to fall. But it would not happen all of a sudden. Neither do we promise to deliver any rate of returns. Yields are not our primary concern. We are most concerned with risk control.

The U.S. payment company PayPal introduced a money market fund service in its second year. It shut it down in 2011 as investment shrank. Do you worry that this may be where Yu E Bao is headed?

We have been thinking about this since the first day Yu E Bao was launched. Now that we have grown, whether we will become a second PayPal is more of an issue. The puzzle is not only ours. It is true for the entire money market fund industry.

A big question is: If China has a zero interest rate like the United States, is there still a reason for money market funds to exist? This may not happen very quickly, judging by current conditions. For China to have zero interest rates for a long term, it has to have gone through a very large economic cycle.
Regarding yields, here's the latest 互联网理财收益下滑 余额宝将破6%理财通降1%. In short, these products have seen yields plunge more than 1% in the past few weeks, from 7.9% down to 6.8%. During the mind-month mini-panic over the default of the trust, along with the annual pre-Spring Festival cash crunch, 7-day annualized interest rates surged to between 11% and 13%. If investors are turning cold on trust products, they still need someplace to park their cash and no doubt these funds may be attractive, but the iron law of finance is still in effect. The larger these funds get, the lower the yields will go.

Thus far I've only mentioned Alibaba's product. Both Baidu and Sina have money market funds too. There's also a new entrant into the field from Tencent's WeChat program.

Text, Chat, Profit: Tencent Launches Investing on WeChat
The new service is no doubt aimed at competing with Alibaba’s service, which was introduced last year. It’s also likely a ploy by Tencent to entice users to link their bank and WeChat accounts. The fund, called Licaitong, offers an impressive 7.3940% seven-day annualized yield, besting Yu’e Bao’s rate by almost 1%.

China’s financial sector has long been dominated by state-owned banks, but technology companies have begun to enter their turf by using online platforms to push innovations in the sector.

Though Alibaba was first to push into the sector, others have been hot on its heels. It isn’t known how many customers or how much investment Licaitong attracted on its first day, but a promotion giving away cash prizes to promote the new product attracted enough users to crash the system, according to Chinese magazine Caixin. Tencent’s official QQ customer service said the promotion has been postponed.

Alibaba, Sina cast envious eyes on Tencent's 'Hongbao'
WeChat's red envelope function allows users to bind their bank cards to their WeChat accounts, and then designate sums of money to put in a virtual red envelopes that can be sent electronically to other users. It looks like Tencent didn't actually make any money from the envelopes themselves, but instead benefited by getting 5 million of its users to bind their bank cards to their accounts. That's an extremely important step as Tencent tries to build up lucrative e-commerce business on WeChat. By comparison, the mobile arm of Alibaba's Alipay mobile service, known as Alipay Wallet, currently has about 10 million registered users. According to Tencent, users sent some 20 million red envelopes over the first 2 days of the Lunar New Year.

Comments from Qihoo 360 (NYSE: QIHU) executive Tao Weihua were typical of the generally positive sentiment towards Tencent, praising WeChat for its latest success and also taking a backhand poke at Sina for failing to develop a similar product for its equally popular Weibo service. Baidu (Nasdaq: BIDU) wireless executive Yue Guofeng similarly noted that the huge success of the Tencent product marked a turning point for Sina Weibo, whose popularity has recently started to drop following its meteoric rise over the last 3 years.

Alibaba certainly understands the threats to its dominance in both e-commerce and electronic payments posed by WeChat. It launched Laiwang, a rival mobile social networking app, last fall and has aggressively promoted the product at every possible opportunity since then.
Financial competition is now driving innovation in social networking. Despite criticism of being copycats and tightly regulated by the state, the Chinese economy is one of the most dynamic in the world in many areas because it is developing old and new markets simultaneously with lots of crossover experimentation. In the short term, these products are a result of the credit bubble: with so much cash sloshing around the Chinese economy, funds can rapidly grow in size, but they are still part of the overall financial system. Though these funds present competition for traditional asset managers, they will be unable to escape a financial crisis, at which point their very existence could come into question. Would investors trust Alibaba over their local bank? If I was a bank, I would start working on my brand image.

For more on Weixin/WeChat see:

5 ways China’s WeChat is more innovative than you think

A Popular Chinese Social Networking App Blazes Its Own Path

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