The New York Times reporter reported on China's Internet financial phenomenon

Lead: The New York Times journalist, Pulitzer laureate David Babosa David Barbosa, wrote this week about the Internet financial phenomenon in China. China's many internet giants are targeting Internet financial markets, including Alibaba, the article said. By providing yields higher than bank deposits, these internet financial services have amassed huge users. On the other hand, it exposes the problems of the traditional financial system.

The following is the full text of the article:

Last June, China's power-maker Alibaba Company, Alipay, launched a new product "balance treasure" for hundreds of millions of of users and conveyed the message that by giving us the money, we would pay more than the bank's interest in investment income. Subsequently, many depositors transferred money from the bank to the balance treasure. By the beginning of February this year, 81 million users have registered to use the balance treasure.

The fund, which is owned by a fund company called the Tianhong Fund, currently manages 40 billion of billions of dollars of assets, is already China's largest monetary fund.

Other Chinese internet companies have followed Alibaba's footsteps, even offering a higher yield than the surplus treasure. This has hit an important tool in the Chinese government's economic management: interest rates.

"This is the beginning of the marketization of interest rates," said Zhang, a professor at Shanghai Jiaotong University's Senior Finance Institute. People want higher deposit rates, a way to deal with regulation. ”

Mr. Ma, Alibaba's chairman, said China's financial regulation was not good for small investors and ordinary consumers, and called for reform of China's banking and financial services sector. "The financial industry needs some change to drive the revolution," he said in a speech last June. ”

Savers become the biggest winners

So far, the biggest winners have been Chinese savers. Their savings now yield 6% annual returns. Traditional banks are usually less generous, while the one-year term deposit rate is the highest for only 3.3%.

Over the years, Chinese policymakers have pledged to push interest rates to market as part of economic reform. China's reforms are designed to allow market forces to play a more important role in economic development in order to promote healthy and sustainable growth. However, perhaps due to strong opposition from banks and other state-owned institutions, the government's control of interest rates has so far not eased.

However, the Chinese government has decided to allow Internet companies to provide broad investment and financial services. Analysts say this is to find alternative options for state-owned banks to loosen control of interest rates.

While the funds involved are still relatively small (only about $50 billion trillion in $9 trillion trillion), the rapid growth of China's internet finance has sparked more intense deposit competition and put greater pressure on the dominant state-owned banks. Recently, these banks have experienced liquidity problems. At the same time as the development of Internet finance, the Chinese government is trying to restrain the development of shadow banks. Shadow banks are often far away from regulation, creating huge risks that could lead to high debt.

But not everyone is happy with the development of internet finance. In recent weeks, some critics have claimed that online financial products are "vampires sucking blood from banks" and that investors may not be aware of the risks. China's regulators said at the end of February that it was considering introducing new regulations to manage the industry.

On the other hand, leaders of China's internet finance, such as Alibaba, Baidu and Tencent, have all begun to clarify the risks of these investment products. They say that Internet financial products operate within the framework of the law and that investment risks are extremely low. Analysts say there is no doubt that the development of China's Internet finance will face real challenges. For example, although Internet financial products are considered similar to deposit accounts in advocacy, they are actually risky investment products. The principal is not guaranteed, and if the user suffers a loss, there will be a wave of redemption.

The dilemma of traditional interest rate policy

In the past 10 years, the Chinese government has set a cap on deposit rates and a lower limit on lending rates, which has helped state banks. The giant net-interest bank has made a huge profit to help the banks cope with the huge losses from the 90 's.

However, as China's inflation rate is usually higher than the government-controlled deposit rate, savers find their bank deposits significantly devalued. Economists believe such a policy is akin to taxing depositors.

In addition, it has forced some well-funded investors to put money into "hard assets", namely, artwork, gold and real estate. In recent years, many investors have sought higher yields by buying wealth-management products, and financial leasing companies, trust firms, and even local banks have launched such financial products. However, because financial products are often used to finance property developers and government infrastructure companies, there are risks.

Investors are now turning to online investment products. The high interest rates offered by the balance treasure have exposed weaknesses in China's financial system. Compared with Europe and America, Chinese savers have few investment options, especially when interest rates are fixed.

Mainstream Chinese internet companies are now trying to break the control by targeting ordinary savers with spare cash to launch High-yield products. Gao Yue, a 25-year-old health consultant in Beijing, has deposited about 15,000 dollars into the balance treasure account since last October, the Gao Yue.

"I would be happy to put the money here as long as I get a higher return than the regular bank deposit," she said in an interview. It's better than running and losing inflation. ”

The rise of the balance treasure

Alibaba is a major player in this new industry. Over the years, the company has dominated China's online shopping market with Taobao and cat, and has even developed a loan business for small businesses. 2013, Alipay began to work with Tianhong Asset Management company to develop financial services.

Alipay's 800 million registered users are encouraged to transfer the balance in the online shopping account to the balance treasure. The rate of return offered by Tianhong fund far exceeds that of bank deposits.

Soon, the balance treasure has achieved rapid development. Analysts believe that the balance of treasure is the attraction of simplicity and convenience. The owner of the Alipay account can transfer the money from a low to 1 yuan (about 16 cents) to the balance treasure, and can withdraw funds at any time without any loss. In addition, users can get daily earnings information from their mobile phones.

"The appeal of the balance treasure is to allow small investment," said Joe Zhang, a Hong kong-based banker, Choy Zhang. You don't have to invest too much money. Small investment is a killer application. ”

A probe into high yield

So why does the balance treasure offer such a high rate of return? Its managers say the balance of the treasure is most of the capital investment banking market, that is, banks and other financial institutions between the short-term lending to each other. Interest rates in the interbank market have been high last year because of the tight liquidity of banks, especially small banks.

"Banks are clearly short of cash," said Charlene Chu, a former Fitch rating China banking researcher Chu. That's why the interbank rate is rising. ”

In the United States, PayPal has also operated online money fund products for years, but the product was closed in 2011. Since then, mainstream American internet companies have not been involved in banking or investment operations.

But Bill Harris, a former PayPal CEO, said the US internet company missed a huge opportunity. "The reason nobody does it is because nobody tries." If a tech company does it, it can build a system that doesn't require manpower. Amazon can do it, PayPal can do it, and Apple can certainly do it. I think they missed the chance. ”

Analysts believe that high interbank rates suggest a liquidity squeeze, which means banks and financial institutions are likely to default and bring losses to investors. And if liquidity improves, interbank rates will fall, which means lower yields and return on investment.

But for now, internet financial markets are still very attractive. Alibaba and its partners currently manage 40 billion of billions of dollars in assets, and the associated management and service charges are expected to reach $250 million a year. Baidu and Tencent have also launched new funds in partnership with other fund companies, including the state-run Huaxia fund.

"Internet finance will continue to exist, and internet companies are targeting an area that banks are not paying attention to," said Zhungruihau Johnson Chng, an A.t.kearney banking expert at the international consultancy firm. ”