Internet financing boom

The success of online wealth management products such as Yu'ebao has pushed Internet financing into the spotlight and it even appeared in the government work report in March this year.

The root cause of the flourishing Internet financing in China lies in the deficiencies of its traditional financing products, which fail to meet market demand, says a Beijing News column.

Internet financing has also been flourishing in developed countries such as the United States - P2P financing, crowdfunding, and Internet insurance instruments have all emerged. However, they are small in size compared to Yu'ebao's more than 500 billion yuan ($80.5 billion). It is clear that Internet financing is especially popular in China.

That seems strange considering the fact that the US takes the lead in both the Internet and financing. But it can be explained by China's underdeveloped traditional financing products, which do not meet people's needs.

For example, Alipay as China's third-party payment service emerged as China's most popular on-line shopping payment choice because traditional banks had complicated procedures and lacked security guarantees. With Alipay, on the other hand, people can conveniently and safely use credit cards online. Another online financial product, Aliloan, which provides credit loans to small- and micro-sized enterprises, experienced fierce growth because China does not have enough small financial agencies to do the job.

The tight control over interest rates has led to similar success for online wealth management products. China has a tight control over deposit interest rates, which is 0.35 percent a year for current accounts and 3 percent for one-year deposits; however, the basic interest rate for loans is 6 percent per annum. Yu'ebao has used the opportunity to attract money from depositors by offering an annualized return of around 6 percent.

Yu'ebao has already accumulated over 500 billion yuan, which is about 3 percent of China's total personal current accounts, and it will continue to attract funds if the current control over deposit rates is not lifted.

It is the deficiencies in traditional financing that led to the Internet financing boom in China. That also tells us there is a huge demand for proper financial products in China and there should be deeper financial reform.