Central Bank Snuffs Out Yu’ebao “Vampire” Moniker
The worrisome “vampire” moniker heaped on Alibaba’s Yu’ebao has died a quiet and appropriate death, with word that China’s top banker has no plans to kill the wildly popular investment product. The pronouncement from central bank Governor Zhou Xiaochuan caps a brief period of turbulence for Yu’ebao, beginning when an influential financial commentator branded the product a “vampire” nearly 2 weeks ago. That comment triggered a heated debate about new competition that private companies are suddenly posing for stodgier state-run banks, which until recently were the only low-risk option for most consumers to deposit their savings. But Zhou didn’t completely let Yu’ebao off the hook, adding that the fast-rising private banking sector needs to be more tightly regulated.
I’ll start off by commending Zhou for his rational approach, since it was far from clear how China’s top banking regulators would respond to the original accusation from Niu Wenxin, a senior financial commentator at CCTV, China’s biggest TV broadcaster and a national opinion leader. (previous post) Niu said that Yu’ebao and the many copycat products that were springing up were like vampires on China’s financial markets, since they were drawing cash away from traditional lenders, lowering bank deposits and therefore hurting their loan-making ability.
Yu’ebao lets consumers invest idle funds into money markets from their accounts with Alipay, Alibaba’s electronic payments service. But Yu’ebao was providing much better returns than traditional savings accounts, whose interest rates are tightly regulated, prompting many consumers to move their funds into the former from the latter.
When the initial vampire comments came out, I said Niu’s claim wasn’t really valid because Yu’ebao didn’t simply keep the deposits for itself but put them back into money markets, which are another kind of financial market. Many other observers agreed, and criticism quickly mounted against Niu’s initial claim. I suspect that his original comments were politically motivated, prompted at the urging of state-run banks that were unhappy about losing business to Yu’ebao and similar products launched by other Internet companies.
Zhou Xiaochuan’s latest words show that he agrees with the consensus, and should come as a welcome relief to Alibaba, which was probably worried about a potential crackdown against Yu’ebao and some of its other financial products. Zhou’s actual comments were brief, given on the sidelines of the National People’s Congress in Beijing, saying the People’s Bank of China definitely wouldn’t ban Yu’ebao or any similar products. (Chinese article) But Zhou was quick to add that the central bank would also make moves to “perfect” its oversight of the fast-growing sector.
Again, I have to applaud Zhou for his rational approach to an issue that could have easily spiraled out of control and ended in a highly disruptive and unproductive crackdown. The debate centers on China’s recent moves to open up many of its most protected sectors that were dominated by state-run firms to private investment. One of those sectors is banking, an area that has failed to adapt to China’s rapid modernization and where many practices remain largely unchanged from 30 years ago.
That said, I do also agree that Beijing needs to take a more aggressive approach to regulating this emerging new sector. Regulation is typically much looser for investment products like stocks and mutual funds than it is for banking products like savings accounts, since investors are supposed to know the former have much higher risk. But I’m fairly certain most consumers who have flocked to Yu’ebao and similar offerings don’t realize they are often taking much higher risk with these products. Accordingly, the regulator needs to take steps to both warn consumers of the risks, and also to better protect them in the likely event that some of these products will ultimately lose money or even fail.
Bottom line: The central bank’s announcement that it won’t ban Yu’ebao will boost the private financial sector, which will be allowed to grow under stricter supervision.
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