If Chinese Banks Didn't Have Enough To Worry About, Here Comes More

Chinese Banks' Four-Front Online Battle
First, online money-market funds are luring deposits away. The government caps the rates banks may offer on deposits, so lenders have had to respond by offering other products, with higher yields, paying more for funds. So far, the online funds' share is still tiny, equal to about 2% of bank demand deposits, but Credit Suisse expects that to quadruple to 8% this year.
Alibaba pays about 6% for deposits. The big banks pay 4%. Interest rate deregulation has led to higher interest rates especially at the lower end, which destroys the banks' easy profits.
Ironically, these online money-market funds became so popular so fast because of intermittent cash squeezes in the banking system, which have caused a surge in yields on loans between banks. Funds like Alibaba's Yu'e Bao took advantage of the high yields to offer returns above 6%, attracting investors looking to do better than the typical 4% offered on similar funds sold by banks. A demand deposit account at a bank earns just 0.35% a year.
The more money that leaves the bank, the better the odds of a cash crunch at the end of March (odds are already near 100%). Another spike in interest rates and surge in Yu E Bao yields will draw in more deposits.

Scrambling to match terms offered by those cash-rich innovators will hurt bank profits. In highly competitive markets such as Wenzhou, Industrial & Commercial Bank of China, Ping An Bank and others already try to keep up with the Internet players by offering money-market products of their own that yield more than 6%. Having to roll out such products nationwide will drive up banks' funding costs further, affecting their ability to raise new capital to cover expected loan losses.
The reason why the banks can charge high rates for loans and can pay low rates for deposits is because of financial repression. The government instituted this policy to recapitalize the banks. Now, banks are in bad shape once more. They added bad debts from 2009 to 2013 at the behest of the Party and now they're being repaid with interest rate deregulation.
Even if the yield difference between money-market funds and bank deposits narrows as China's cash crunches ease, online finance will retain its edge in convenience and efficiency. The great switch is just starting. In the U.S., within seven years of the opening of the first money-market fund that allowed check writing, assets in money-market funds had grown to equal almost half of household bank deposits.

The second front is payment services. Chinese consumers are already using their phones to pay taxi fares and exchange electronic "red packets"—cash gifts for occasions like the New Year—through apps such as WeChat. Although many are still concerned about the security of transferring money over the phone, this fear should fade.
This. When you invest in Yu E Bao, you get an update every day of how much money you earned that day, what the interest rate was, along with a chart showing the change in interest rates, all delivered to your mobile phone.

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