Moneyinthe CyberBank

By Nicholas Compton

Just days after Chinese e-commerce giant Alibaba rolled out its online Yuebao personal finance platform in mid-June， Liu Shaohua， 24， transferred in several thousand yuan from a low-interest savings account that was wilting in the face of inflation.

Given Yuebaos current annual interest rate of more than 6 percent （compared to Chinese banks one-year deposit rate of 3.5 percent）， its lack of a minimum deposit requirement， and the ability to transfer and withdraw funds easily without paying a commission， Liu says it was a no-brainer to invest in Chinas newest ， and most-buzzed about， online investment service.

“Its the convenience of investing in this fund thats made it popular. I dont have a lot of money as Im not working yet， but Id like to make investments and I have certain amount of money which I dont need to use right now. To take your money out of Yuebao is just as easy as putting it in.” Liu， who lives in Beijing， said.

Public thumbs up

He was not alone. In just a week， the online platform that works through Alibabas online finance arm Alipay （a Chinese version of Paypal） and partners with Tianjin-based Tian Hong Asset Management Co.， had attracted 1 million users， with deposits approaching $1 billion. A month after it was unveiled， in mid-July， it had 4 million users and more than $2 billion in deposits.

Yuebaos popularity has rocketed， in large part， because of consumer confidence in its parent company， Alibaba， and its link to the companys online payment platform， Alipay， which claims close to 600 million active worldwide users （800 million registered accounts according to the companys website）.

Hangzhou-based Alibaba， which runs Taobao， TMall， and a host of other ecommerce sites， accounted for 70 percent of package deliveries in China last year， with sales reaching $163 billion， or 2 percent of Chinas GDP， according to statements released by Yahoo. The American tech giant currently owns a 24-percent stake in Alibaba and gave investors a glimpse into the companys finances during its latest earnings report.

“Chinese trust Alibaba as an established brand with the finances to sustain products like this. If all did go pear shaped， theyd be confident that their money would be returned， and when you have millions of other depositors， the likelihood of drastic government measures diminish，”said Mark Tanner， Managing Director at Shanghai-based China Skinny， an online market-research firm.

Big player

In preparations for a possible public listing in the months to come， some financial analysts have estimated Alibabas worth at more than $100 billion， rivaling Facebooks $104 billion valuation last year before its $16 billion IPO - the largest ever for a tech company， and the third largest of all time.

Analysts are able to justify the sky-high valuation because of the explosive growth in Chinas online retail sector. McKinseys estimates the Chinese online retail economy， with Alibabas operations as a core engine， will reach $650 billion by 2020， eclipsing the United States to become the worlds largest market. China is currently the second largest market in the world， with online retail sales reaching $210 billion in 2012， and an annual growth rate of 120 percent since 2003.

In announcing Alibabas intention for Yuebao and Alibabas foray into financial services to Chinese media， the companys founder and chairman， Jack Ma， said， “Chinas financial industry， especially the banking industry， only serves 20 percent of clients， and I see there are 80 percent of the clients [who] are not covered. Financial services should be about serving the layman， rather than playing inside your own circles and making money yourself.”

Risk factor

Despite its enthusiastic embrace by investors， Yuebao does face uncertainties. Foremost among them is regulatory limbo. It hasnt yet been cleared by the China Securities Regulatory Commission （CSRC）， although company spokespeople said the requisite paperwork has been submitted， and Yuebao risks fines or even forced closure if it doesnt pass that proc-ess soon. Observers believe， however， that Alibaba， and in turn Alipay， have enough clout and reputation to gain government approval.

Also， because deposits are transferred to the oversight of Tian Hong， which invests them in various funds and bonds， there is a certain degree of investment risk. Although handsome returns are loudly broadcast， the fine print warns of potential losses.

“The underlying investments are meant to be relatively risk free bonds and bank deposits， so the risk to the consumer is somewhat less，” said Zennon Kapron， founder of KapronAsia， a financial industry consultancy. “Considering the recent high-profile failures of several bank wealth management products （WMPs）， we think the general public users are aware of these risks， however small they may be.”

To date， Yuebao has only been used in China and is unlikely to expand internationally due to currency and financial regulations.

Excellent timing

In June， Chinas banks experienced a cash-squeeze that spurred the Shanghai interbank overnight lending rate to a record-breaking 13.44 percent on June 20. Although the liquidity crunch has since abated， with the central bank taking steps on July 20 to liberalize interest rates and promising stricter regulation of murky WMPs offered by banks as an alternative to low-yielding accounts， Chinese investors were rattled.

Up to then， there were few clear-cut， ostensibly lowrisk， investment vehicles besides the bank-offered WMPs that commonly have a minimum deposit requirement of at least 50，000 yuan （$8，000）， can carry stiff penalties for early withdrawal， and are under scrutiny for their rapid proliferation and uncertain sustainability. Alipays Yuebao， with an attractive yield， immediate liquidity and no limit on deposits， seemed irresistible. All a user has to do is clicking a button to transfer idle cash sitting in their Alipay account into the fund， and clicking another button to transfer it back.

“[Yuebao] Reaching 100 million users is conceivable，”Li Xiaohui， a researcher at China Security News， said， citing Alipays 500-million-plus user base.

“Its an easy process that seems hard to refuse. The money is just idle on your account， why not invest it into something with a little return， then switch it back when you need it？” Li said， adding that users must not overlook the risk associated with entrusting a fund-management company to invest their deposits.

While Yuebao continues to tempt Alipay users into transferring at least a portion of their balances into the fund， it wont be long before other major players enter the online finance arena， Kapron said.

“There will certainly be imitators. As an example， Tencent has a very large customer base and also has a payment product， so could quickly move into the space，”Kapron said， clarifying that he doesnt expect Yuebao or its imitators to impact the popularity of banks WMPs， because most Yuebao deposits come from idle Alipay funds， rather than “large amounts of money in the short term.”

Currently， its not possible to withdraw Yuebao funds without first transferring them back to an Alipay account， and then depositing the amount into a tied-in bank account. That extra step has not deterred Liu Xiaohua， who plans to continue using the platform ahead of any other investments.

“We all know Alibabas excellent reputation， and were quite excited and surprised to have this opportunity. As long as Im not investing thousands of yuan， why not[continue]？” Liu said.