Chinese banks call for cap on online interest rates

Lobbying comes as online products drain cash from traditional bank deposits

PUBLISHED : Friday, 28 February, 2014, 1:10am
UPDATED : Friday, 28 February, 2014, 1:12am

The China Banking Association (CBA) is lobbying regulators to cap the yields on online money market funds, two bankers said yesterday, in the boldest effort yet by banks to answer the threat from online financial products.

If adopted by the central bank, the proposal would subject yields on online money market products to the same administrative cap that governs traditional term deposits, effectively eliminating the key competitive advantage that online products enjoy.

Bankers formulated the proposal at a meeting of the association on Tuesday, the sources said.

"This can be seen as the direction that the commercial banks want to move," said a senior executive at a major state-owned bank in Beijing. "But the banking association just wants to serve as a spokesman [for the industry]. [The regulation] it's hoping for can't necessarily be achieved."

Since its launch in June, Alibaba's deposit-like money market fund, Yu E Bao, has attracted 400 billion yuan (HK$511 billion) in assets under management, more than the customer deposits held by the five smallest listed mainland banks.

Similar online products from Baidu and Tencent also contributed to a fall of one trillion yuan in bank deposits last month.

The rates on mainland bank deposits are now subject to a cap of 10 per cent above the benchmark set by the People's Bank of China. The current benchmark is 3 per cent for one-year deposits.

By comparison, the annualised yield on Yu E Bao is 6.09 per cent. Moreover, unlike bank savings deposits, investors in Yu E Bao and similar products can withdraw cash at any time with no penalty.

Yu E Bao and other products currently invest most of their funds in interbank deposits, which are not subject to the cap governing retail deposits.

This structure lets Alibaba pass on higher interbank yields, but it hurts bank profits by reducing their supply of low-cost deposits while increasing reliance on relatively expensive funding from the interbank market.

"The question of whether to treat bank deposits from Yu E Bao and similar products as interbank deposits or to begin treating them as normal [retail] deposits - the PBOC has the final word on this," said a source close to regulators.