Jake's View | Alibaba conjures up 'fantasy' returns

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.

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.