Yu E Bao's future may offer clue to the potential of state reforms
How the CSRC handles Alibaba’s new investment product may reveal whether Beijing sends in private entrepreneurs to shake up state sector
The words to watch next year are Yu E Bao (Leftover Treasure). They will offer a significant clue to the role of private entrepreneurs in the eyes of President Xi Jinping and the potential of his reforms.
But don't focus on the amount of money depositors put into the new investment product, distributed by Alibaba, even though it grew from zero in June to more than 100 billion yuan (HK$127 billion) by the end of last month and is breaking records every day.
How it is treated by the regulators is the game to watch.
For small depositors on the mainland, Yu E Bao is a dream come true. Say you put 1,000 yuan into an account with Alipay, the mainland's largest third-party online payment system. You spend 200 yuan on a pair of shoes and put the rest into Yu E Bao.
You get more than 5 per cent interest from Yu E Bao, compared with the close to zero rate offered by banks. And you can spend the money at any time on a must-have item found on the internet.
It is not hard to imagine the shock this has caused to traditional banks. Who will keep their money in banks when they can enjoy the convenience of a demand deposit with the returns of a longer-term deposit without having to lock up their funds?
Nor is it hard to list the risk. Yu E Bao says fund manager Tianhong Asset Management invests the money in low-risk money market funds. Yet, in the financial world, risk and reward are rarely disproportional.
Normally, the risk-averse regulators would have thrown a straitjacket on to Yu E Bao immediately, if not banned it outright in the name of financial stability. However, they did not.
On July 2, less than a month after the product was launched, the head of the central bank's consumer rights protection division, Jiao Jinpu, told the People's Daily that money market funds were riskier than Yu E Bao claimed.
Noting that such funds had suffered huge losses in 2006, Jiao said: "I am not saying whether its statement is true or not. I am just saying the public has been buying Yu E Bao for its high returns. What if there's some problem? Is the government supposed to bail it out?" While she stopped short of suggesting any constraints, she did ask for Yu E Bao's disclosure of risks to be printed in bigger type.
Three days later, the China Securities Regulatory Commission came up with an even more cordial response. Its spokesman said Yu E Bao "is under effective regulation in all aspects". The fund had been approved and Tianhong had satisfied all checks.
If depositors had any doubts about Yu E Bao's regulatory risk, they were completely dispelled by those comments. And the rest is history.
While 100 billion yuan may be peanuts compared with the mainland's mammoth bank deposits, the banks are reacting. Industrial and Commercial Bank of China will roll out its own version next month. Its chairman called it a "battle". They are feeling the heat.
Yu E Bao is stealing the juiciest meat from banks - demand deposits for which they pay 0.35 per cent and with which they lend out at more than 6 per cent. So far, 30 million people have joibed Yu E Bao, a fraction of Alibaba's customer base.
It is almost impossible to explain Yu E Bao's advance as a case of regulatory slippage. Let's not forget the political and economic clout that state-owned banks can wield.
Can it be that a blessing from the very top made Yu E Bao possible? When you can't get the elephants to move, you send in the mouse.
Amid all the hype about state-sector reform, last month's third plenum of the Central Committee managed to extract few concessions from the state-owned enterprises and the families that back them.
Of course, the mouse has to be a loyal one. Alibaba founder Jack Ma Yun has publicly supported the Tiananmen Square crackdown. Xi and various state leaders have expressed their high regard for Alibaba and Ma on various occasions.
It won't take too long to discover whether Ma is the chosen one and whether other loyal private entrepreneurs will be sent in to get the elephants to dance in other industries.
In October, Alibaba acquired 51 per cent of Tianhong, the fund manager for Yu E Bao, for 1.1 billion yuan. If the deal is approved, Alibaba will get hold of a fund management licence and a springboard to other financial business.
How about packing the loans extended by Alibaba's microfinance arm into a securitised product and selling it through the fund house? Alibaba the financial conglomerate will not be a distant dream in that case.
There is a catch though. Under mainland regulations, only a financial entity with a track record of three years can control a fund house. It will be quite difficult for the e-trading giant or any of its subsidiaries to portray themselves as such. Any green light will come in the form of special approval.
You can be sure that the banks and their backers are exerting all their might to scupper the Tianhong deal.
All eyes are now on the CSRC, which is vetting the deal. Don't blink.