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Banking & Finance

Chinese state-owned banks strike back at online challengers

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The Industrial and Commercial Bank of China is one of the country's Big Four state-owned banks.   © Reuters

BANGKOK -- Screws are tightening on Chinese online financial services companies that have shaken up a sector long-dominated by cosseted state-owned banks.

     In the past month, the People's Bank of China has nixed plans by Chinese Internet companies to issue millions of "virtual credit cards." The central bank has also banned payments using QR codes -- a system, recently launched by major e-commerce players Alibaba and Tencent, that allows anyone with a smartphone to make cashless purchases at participating stores.

     The biggest threat to the burgeoning online industry, however, is a set of draft rules published by the central bank in March. These restrictions could seriously cut back on the types and scale of financial services Internet companies can provide. State-owned banking giants have already imposed transfer limits that make it harder for their own customers to shift funds to online rivals.

Fearful four

The success of the online players has spooked China's state-owned banks as well as UnionPay, an electronic payment and credit card monopoly jointly owned by the banks. The clampdown started in March -- about nine months after Alibaba, the world's largest e-commerce business, launched Yu'E Bao, a game-changing Internet investment fund.

     The Big Four -- Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China -- slapped their own daily and monthly caps on direct transfers to online investment funds like Alibaba's.

     The central bank cited security concerns for its decision to ban payments with QR codes -- black-and-white matrix bar codes readable by smartphone cameras. But it is Alibaba's and Tencent's aspirations to enter the lucrative field of credit that, according to Anne Stevenson-Yang at J Capital Research, brought them a step too far. This is where banks earn high margins. The central bank quickly stomped on the virtual credit card idea.

     Now the PBOC's proposal to limit the online sector could bring in wider limits on bank transfers to online or mobile payment accounts, such as Alibaba's Alipay service.

     The crackdown prompted Alibaba's founder and Chairman Ma Yun, also known as Jack Ma, to say on his microblog: "This is the toughest moment but it is also our proudest moment." After all, Ma vowed to change the financial industry -- and he has.

     Bricks-and-mortar banks have lifted their interest rates on fixed-term deposits to compete with better-yielding online competitors. Some have also launched their own mobile money market funds, mimicking the likes of Yu'E Bao. China Minsheng Bank has a smartphone app called Ru Yi Bao, which has a minimum investment of 1 yuan and allows same-day redemption. ICBC, the country's largest bank, has launched a fund named Tian Tian Yi. Both offer just slightly lower rates than Yu'E Bao's.

New rules of the game

Chinese banks were not used to competition. But all that has changed since Ma set his sights on financial services.

Yu'E Bao, Alibaba's online money market fund, had 81 million customers as of Feb. 28.

     Yu'E Bao, which translates as "leftover treasure," was launched last June. It is managed by Tianhong Asset Management and offers annualized deposit rates between 5-7%. The rates track daily movements of the interbank market.

     Depositors can withdraw their money any time while earning 15 times more interest than they would at a bank. The lure of high returns has made Yu'E Bao the world's largest managed fund with 500 billion yuan ($80 billion) and 81 million customers as of Feb. 28.

     Other Internet companies, such as Tencent, Baidu and Sina, have followed Alibaba into the fray. They may not be able to offer full bank services yet -- though Alibaba and Tencent have recently secured official private bank licenses -- but they have been incredibly successful at cherry-picking areas where banks have shown limited innovation and customer service.

     In addition, Alibaba's ubiquitous Alipay platform and, to a lesser extent, Tencent's Tenpay, have stolen the march on the fixed-line UnionPay in mobile payments. They made a combined $3 billion on the back of $200 billion in transactions last year. Baidu, a Web services company that also offers investment products, in April launched its own third-party mobile payment system.

Liberalization warm-up

An important ideological battleground has emerged between China's privately held online companies and state-owned banks. This follows assurances by the country's top leaders that they would open more doors for private enterprises -- part of a wave of reforms aimed at rebalancing the economy with a "larger role" for the market.

     Opening up the nation's banking sector is one of the key reform planks.

     "Banks should not be resistant to the online funds," stressed Lu Zhenwang, CEO of Wanqing Commerce Consulting, a financial services consultancy in Shanghai. Instead, he said, they "should adapt to the trend of e-banking, the trend of marketized interest rates, and be more innovative."

      Lu suggested the online competitors are merely spurring banks to start adapting to the gradual liberalization of interest rates in China. Zhou Xiaochuan, the central bank's governor, last month said the country could complete the process of removing restrictions on bank deposit rates in one to two years.

      This will dramatically change the way Chinese banks do business.

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