Beijing to tighten regulation of internet finance products

PUBLISHED : Wednesday, 05 March, 2014, 1:38am
UPDATED : Tuesday, 23 January, 2018, 11:45am

People’s Bank of China governor Zhou Xiaochuan says new rules will be issued to tighten  the online savings market as internet finance booms.
The mainland would “definitely not” ban internet finance products such as Yu E Bao,  but regulatory control would be improved, Zhou told Xinhua yesterday.

Speaking on the sidelines of a group meeting at the annual session of the Chinese People’s Political Consultative Conference that was closed to overseas media, Zhou said such online products were not supervised closely at present but that would change.

“More policies will be implemented to perfect regulation,” he said.

Bankers are lobbying regulators to tighten scrutiny of internet finance after rapid gains in the popularity of money market funds launched by e-commerce company Alibaba,  search engine Baidu  and technology company Tencent  last year.

Since its launch in June, Alibaba’s Yu E Bao money market fund has attracted 400 billion yuan (HK$506 billion)  in assets under management, more than the customer deposits held by the five smallest listed mainland banks.

The online products invest most of their funds in interbank deposits, which are not subject to the cap governing retail deposits and thus reflect rates in a free market. This structure lets Alibaba pass on higher interbank yields, but it hurts banks’ profits by reducing their supply of low-cost deposits.

The China Banking Association,  on behalf of commercial lenders, was lobbying regulators to cap the yields on online money market funds, bankers said.

The annualised yield on Yu E Bao in the week to Monday was 5.93 per cent, while the current benchmark rate for one-year bank deposits is 3 per cent. Banks are allowed to offer deposit rates a tenth higher than the benchmark rate.

“The development of internet finance, including Yu E Bao, will benefit the financial market as competition will be introduced,” said Xia Bin,  a senior economist formerly with the research arm of the State Council.

More competition was in line with the direction of financial reforms designed to allow market forces to play a bigger role, he added.

But Xia warned against the rising risks and urged regulators to formulate guidelines for the business. “Guidelines should be introduced shortly as we see risks related to internet finance mounting,” he said. “The regulators should at least step up their research efforts.”

He said the authorities should better protect depositors who invested their money through online platforms.

Professor Li Daokui  from  Tsinghua University, who is a former adviser of the People’s Bank of China, said an appropriate supervisory system was urgently needed for the internet finance sector. “For example, Alibaba should be asked to set aside reserves for Yu E Bao,” he said.

Big banks on the mainland have to set aside 20 per cent of their deposits as reserves, while smaller  players have to set aside 16.5 per cent. But because internet companies do not hold banking licences, they are not subject to the reserve rules.