When Ant Financial added a money market fund to its payment app, few people expected it to become the biggest in the world a couple of years later. Its runaway success is a sign of China’s financial potential, as well as a deep and worrisome imbalance within its $13 trillion economy.
First, the good news. Just six years after it was launched, some 588 million Chinese—more than one-third of the country—access the fund through Alipay, the ubiquitous payment app that is part of Ant Financial, an affiliate of e-commerce giant Alibaba. Even after shrinking to its lowest level since 2016, it’s still the biggest money market fund in the world, overseeing the equivalent of about $148 billion in assets, as of March 31.
The fund is called Yu’e Bao, meaning “leftover treasure,” and was launched by Tianhong Asset Management, which is 51% owned by Ant. (The fund’s proper title is Tianhong Yu’e Bao, which is an individual fund on Alipay’s overall Yu’e Bao wealth management platform.)
Why is Yu’e Bao (pronounced “Yoo Uh Bow”) so popular? Part of the reason is that it’s very easy to use. The fund was designed for spare cash, and Chinese consumers treat it like a checking account; they’re able to pay for anything from taxis to coffee straight from their investment holdings. At around 2.3%, it isn’t the highest-yielding money market fund in China, according to Li Huang, associate director at Fitch Ratings in Shanghai. Instead, part of Yu’e Bao’s extraordinary popularity comes from how seamlessly it is integrated with Alipay.
But rather than a sign of genius for innovation, Yu’e Bao’s rise reflects deeper distortions in the Chinese financial system, says Fraser Howie, an independent financial analyst in Singapore.
“Why on Earth are there so few opportunities, that the best thing you can do with your money is put it in a money market fund?” says Howie, co-author of Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise. “There is just a tremendous amount of money that’s been printed in China, a tremendous amount of liquidity that’s out there. So it is a sign of imbalance.”
The Chinese government’s development model has forced households to subsidize the cheap credit necessary for a decades-long investment binge. These households have limited options: They can’t easily invest in international stocks and bonds because of capital controls. Savings account yields, effectively constrained by the central bank, are chintzy. Such low yields help state-owned banks remain solvent, and give them a cheap source of capital to carry out the Communist Party’s objectives. But regular Chinese people, with their heroic amounts of savings, don’t have enough places to invest, and they stand to lose money from inflation on their savings accounts.
That leaves people in China with a limited menu of risky options, like real estate, the stock market, and (even riskier) peer-to-peer lending—many of which have burned ordinary investors. Presented with a rollercoaster domestic stock market, dodgy peer-to-peer investments, and Tianhong Yu’e Bao—an easy-to-use money market fund—many Chinese have chosen the latter.
There are good reasons to keep an eye on top-heavy (ie, systemically important) money market funds. For reference, the Reserve Primary Fund in the US held roughly $65 billion when it stumbled in 2008 (it had invested in commercial paper issued by Lehman Brothers), triggering a run on money market funds and nearly pushing the Western banking system into an abyss. These funds are typically thought of as ultra-safe, but the Primary Fund panic was a demonstration that, unlike savings accounts, such funds are not guaranteed by the government.
Many users may not realize that Yu’e Bao is riskier than a savings account, but the Chinese government does. Watchdogs began tightening regulation (link in Chinese) on money market funds in 2017, through things like limits on lower-quality assets and limits on exposure to borrowers. These days, the fund invests in more liquid assets. In 2014, some 90% of its investments were allocated to time deposits, which are considered hard to trade because they can’t be withdrawn until they mature. The fund’s share of time deposits has recently declined to 49%.
Alipay’s fund platform now offers around 19 other money market funds that aren’t operated by Ant Financial and Tianhong Asset Management. Ant also faces competition from Tencent, which runs WeChat Pay, via its rival’s LingQianTong fund, which has offered higher rates than Yu’e Bao.
“It has gotten a lot of attention from the regulator,” says Huang of Fitch, which doesn’t rate Yu’e Bao but tracks the fund as part of its Asia coverage. At this point, “it’s definitely in good shape in terms of liquidity,” making it “less risky and also less attractive to the investors,” she adds.
Assets overseen by the Yu’e Bao fund itself have declined by a 40% from their peak a year ago. These days it oversees about $148 billion, which isn’t so much bigger than JPMorgan’s US Government Money Market Fund, at $135 billion. Fitch’s Huang points out, however, that the amount of money invested in MMFs distributed by Yu’E Bao platform is increasing.
The history of Ant Financial’s money market fund could also be a metaphor for China’s fintech sector, which grew at a torrid pace amid light-touch regulation. Now that watchdogs are on the scene, profits are crimped, and Ant appears to be pivoting toward offering technology services, while leaving more of the pure financial business to traditional financial companies, like banks and asset managers.
That resembles what is taking place in the US, where companies like Apple are keen to offer payments and act as a technology platform, but have avoided taking steps that put them on the receiving end of full-blown financial regulation. (Apple leaves the financial mechanics for its credit card service to Goldman Sachs, for example.)
Howie, a former Morgan Stanley derivatives trader, isn’t so impressed. For all the talk of Ant Financial and Alipay’s cutting-edge technology, he points out that much of the money invested in Tianhong Yu’e Bao ends up with a regular old bank.
“Basically, all they’ve done is, online, they’ve hoovered up all these deposits,” he says. “And what have they done? They’ve turned around and put them in a state-owned bank.”
“Well, that doesn’t look really high-tech to me,” he adds.
With reporting assistance from Echo Huang