Recently I wrote a blog looking at nine e-commerce trends that are predicted in China during 2014. To keep an eye on how these trends develop during the year I’m going to periodically write a blog looking closely at one trend at a time, especially if the trend is making headlines.

This blog will examine trend number two on the list I first wrote: financial e-commerce. What exactly is financial e-commerce and why has it been making headlines in China recently?

Yu’e bao

In 2013 Alipay launched an investment vehicle with Tianhong Asset Management. The service is called Yu’e bao (余额宝) meaning surplus treasure.

Alipay is required to keep at least 10 per cent of the money it handles for clients on a daily basis and to avoid outside investment it started Yu’e bao. By getting users of Alipay to move their surplus money into Yu’e bao by offering high returns the company lessened its burden as required by the central bank.

The service offered high yields of six per cent from very small investments. The rates offered are much higher than interest rates in normal banks with less risk than investing in stocks and shares.

Internet finance

Analysts forecasting financial e-commerce or Internet finance were spot on. The fact that people invested 250 billion Yuan (over US$40 billon) within eight months of the service starting was a great indicator that Internet finance is a trend to be taken seriously in 2014.

Alipay may have been the first big company to move into financial e-commerce in China, but they are certainly not the only one. Big rival Tencent and also Internet giant Baidu have collaborated with fund companies to provide competition to Alipay. Baidu’s financial e-commerce service Bai Fa was launched in October 2013.


So, why has financial e-commerce been in the news recently?

Well, criticism of the service has been publically voiced recently. A prominent executive editor on the Chinese state’s CCTV stock information channel called the e-investment product ‘a vampire sucking blood out of banks’.

There has been talk of regulation to these new e-investments. Dissenting voices worry about the affect these products have on the banking system in China as banks are losing deposits to Yu’e bao. The traditional banks are finding it hard to compete with generous returns of up to 7 per cent annually compared to their 3.3 per cent yields.

There are also worries about a run on Yu’e bao accounts if yields were cut as a result of regulation. As well as that some analysts feel that the risks of these investment funds have been downplayed. The deposits are often promoted as savings accounts but there are risks and if depositors start losing money then this might also cause a run on accounts.

2014 and beyond

Even though there are some negative headlines I believe that financial e-commerce in China is here to stay. There is the argument that PayPal ventured into the online money market fund arena but its product closed in 2011 due to falling deposits.

But in China it looks like these types of funds are here to stay. The financial landscape in China is much different to America because the banks are state owned. Chinese are good savers and there is healthy competition among Internet firms within the e-commerce area.

The analysts who predicted that financial e-commerce would be a big trend in 2014 seem to be correct at this stage and it seems that Internet finance is here to stay.
What do you think about financial e-commerce? Do you invest in Yu’e bao or any other similar investment vehicle? I’d love to know your thoughts in the comments below.

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