Alibaba’s Yu’ebao Branded Vampire
Alibaba’s colorful and sometimes controversial founder Jack Ma has been called many things in the past, but even he must be surprised and somewhat alarmed at the latest monicker of “vampire” given to him by an influential commentator at CCTV, China’s leading broadcaster. I don’t usually take sides in this kind of politically sensitive debate, though in this case I really do think that CCTV’s claim is largely unjustified. I suspect the attack, which Alibaba is correctly taking quite seriously, was prompted at least partly at the urging of big state-run lenders that are unhappy about the meteoric rise of Alibaba’s Yu’ebao service, which competes with traditional savings accounts.
I’ll return shortly to the argument behind the claims of the CCTV senior commentator, Niu Wenxin, and why it seems flawed. But before I do, I should point out that this major attack could mean not only major headaches for Alibaba, but also the many imitators of Yu’ebao that launched similar services in the second half of last year. Niu’s attack is most likely the result of a lobbying frenzy behind the scenes by Chinese banks, which are panicking as consumers put their money into funds like Yu’ebao that offer much higher yields and aren’t subject to the same heavy regulation placed on traditional savings accounts.
We’ve seen similar behind-the-scenes lobbying by state-run giants in the telecoms sector, where a state-led liberalization has created a new field of privately owned virtual network operators (VNOs) to compete with the big 3 telcos. But in that case, the private players should at least have some chance to succeed, since the liberalization is being run by the telecoms regulator. The rapid rise of Yu’ebao and similar services is different because it’s entirely a private sector initiative without any state supervision, and thus could easily become the victim of a major government crackdown.
All that said, let’s look more closely at the “vampire” assessment made by Niu in recent comments that have attracted widespread attention. (Chinese article) Niu’s assertion is relatively straightforward, namely that Alibaba sucks huge amounts of money from traditional capital markets with Yu’ebao, which has attracted 400 billion yuan ($66 billion) in deposits since its launch last June. (previous post) Yu’ebao allows users of Alibaba’s Alipay electronic payments service to invest their idle cash in money market funds, which yield much higher interest rates and aren’t subject to the same strict requirements put on traditional savings accounts.
Niu says that by drawing money into Yu’ebao, Alibaba deprives companies, governments and other entities of one of their most important funding sources. The implication is that Alibaba keeps the cash for itself, and derives huge profits from it. But that implication is misleading and Niu’s argument is fundamentally flawed, since the vast majority of money being soaked up by Yu’ebao is going into money markets, which are also a type of capital market that help to fund economic growth. Alibaba responded with its own carefully worded statement, saying Yu’ebao only keeps a very small percentage of the funds it receives for itself, about 0.63 percent. (Chinese article)
All of that said, I would be feeling very uneasy right now if I were Jack Ma. It’s never good to be criticized so publicly by CCTV — a lesson that others like Apple (Nasdaq: AAPL), KFC (NYSE: YUM) and Walmart (NYSE: WMT) have all learned over the last year. But in most of those cases, the CCTV criticism stemmed from relatively minor issues that could be easily fixed. In this case, Alibaba is being criticized for simply entering this lucrative new business, and more subtly it is being criticized for its audacity in challenging the big state-run banks. I strongly suspect the saga is likely to end in a regulatory crackdown later this year, which could put a significant damper on Yu’ebao’s future growth prospects.
Bottom line: CCTV’s Criticism of Alibaba’s Yu’ebao foreshadows a crackdown on the private financial services sector later this year that could seriously dampen its future growth.
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