Jake's View

Alibaba conjures up 'fantasy' returns

Let us hope this picture does not include any foreign currency exposure or a Mr Ponzi

PUBLISHED : Thursday, 13 March, 2014, 12:51am
UPDATED : Thursday, 13 March, 2014, 4:48am

Since its launch in June, Alibaba's Yu E Bao money market fund has attracted 400 billion yuan in assets under management, more than the customer deposits held by the five smallest listed mainland banks.

SCMP, March 5

The word from Beijing is that the figure has now risen to at least 500 billion yuan (HK$632 billion). This works out to an average of almost two billion yuan a day since inception and leads to an obvious question.

How does an e-commerce internet portal with no previous banking experience take in two billion yuan a day and put the money into secure credit risks yielding more than the 5.7 per cent that it now pays its clients in Yu E Bao fund? How does it manage to keep all the accounts in proper order on such an enormous inflow of money?

The answer you are given is that Alibaba does all this through a 10-year-old Tianjin fund management firm it has taken over, Tianhong Asset Management, which knows all about such things. The money is therefore safe. Simple.

And what does Tianhong do with the money? The given answer is that Tianhong puts all the money to work in the interbank market where it goes to a wide range of reputable banks with creditworthy clients who all have sound commercial uses for the money. Simple.

And how do these banks make any return for themselves, let alone cover their overheads and required reserves, on published borrowing rates that are mostly lower than the yields Alibaba offers its clients? To take just one example, mainland banks must set aside with central authorities a statutory reserve of 19.5 per cent of their deposits and this money yields only 1.6 per cent. These banks already operate under heavy intermediation costs.

But the answer you are given to the question is that the published borrowing rates are all wrong and you do not understand how things really work. Actual market interest rates are much higher but do not indicate any credit risk. In China all debt is always repaid.

Oh, I see. Let's hope we also have such ironclad assurances that there is no element of foreign currency exposure in this picture nor any hint of a foreign gentleman named Mr Ponzi.

Maybe it's true that I don't understand how things really work because it certainly is a mystery to me how an e-trade website can find a sound investment home for a daily tsunami of two billion yuan at interest rates no bank will pay.

But lest anyone think that we are immune from this financial exuberance, I present two charts. The blue line on the first shows the Hong Kong banking sector's exposure to non-bank loans in China. The red line is the sector's total exposure to mortgages in Hong Kong.

And our monetary authority thinks that our property market is our big financial risk.

The second chart shows you that all the deposit action in this town has swung into yuan over the last year. Believers abound.

Who needs to go to Disney for Fantasyland?