Banks, online funds battle for larger share of savings

Internet finance firms are gaining ground on banks, but the online fund products face some new barriers and challenges, WEI TIAN reports from Shanghai

The battle between China's long-established banks and emerging Internet finance organizations for the nation's massive personal savings is getting uglier.

Traditional financial institutions are clearly losing some ground to online upstarts. Bank deposits dropped 940 billion yuan ($154 billion) in January.

Internet finance is in, but is banking out?

Alipay to launch long-term wealth-management product

Alibaba's 'Leftover Treasure' hits 43m users

Some of that money was probably withdrawn for Lunar New Year holiday spending, but some of it evidently flowed into Internet-based money market funds, which expanded by 206 billion yuan during the month.

But it's still too early for the virtual financial world to declare a real victory. Recent actions by regulators may spell trouble for the newcomers.

According to the financial publication Caixin, during a recent meeting with the managers of China's largest money market funds, an official of the China Securities Regulatory Commission said the agency may raise the level of required capital reserves for fund companies to ensure they can repay depositors.

Under current regulations, fund managers must set aside at least 10 percent of their monthly revenues from fund management to meet possible redemptions.

Commercial banks must hold about 20 percent of their deposits in reserves, according to the China Banking Regulatory Commission.

Money market funds are open-ended mutual funds that usually invest in short-term debt securities. They're widely regarded as being as safe as bank deposits, only with a higher yield.

The scale of China's money market funds exploded beginning in June 2013, with burgeoning Internet finance and a variety of online wealth management products introduced by Internet giants such as Alibaba Group Holding Ltd and Tencent Holdings Ltd.

Offering rates of return as high as 7 percent, with easy access through mobile Internet devices, money market funds grew at a daily average of 6.6 billion yuan over the past 12 months.

As of Jan 30, money market funds accounted for 30 percent of the total value of fund assets in China, up from 18 percent only eight months earlier, according to the Asset Management Association of China.

The boom was driven by the launch of Yu'E Bao, China's first online wealth management product, which was offered by Alipay (a division of Alibaba).

On Jan 15, Tian Hong Asset Management Co, which operates Yu'E Bao, became China's largest fund company by assets and the world's 14th-largest money market fund, with an estimated scale of 250 billion yuan.

Don't worry about aggressive credit tightening

Non-resident yuan deposits reach 1.36 trl yuan