By John Richardson
JACK Ma is a popular guy at all levels of Chinese society. And so, last June, the hugely successful online businessman was allowed to write this in a commentary in the People’s Daily, the government-run newspaper: “Innovation in many industries has been triggered by outsiders.”
We think, therefore, that it might be more than just a coincidence that Yu’E Bao (literally meaning: leftover treasure) has been allowed to flourish since it was launched last June. This is another indication that the reformers are firmly in control of China’s government.
Yu’E Bao – the investment arm of Ma’s online marketplace, Alibaba – allows people to place their idle cash in money market funds online.
As Daniël de Blocq van Scheltinga and Paul Hodges wrote in the April edition of their Your Compass newsletter:
- Investors in Yu’E Bao enjoy interest rates higher than those available from the state-owned banks.
- Its growth over the past 10 months has been truly remarkable: It is now China’s largest money market fund with 81 million investors, and deposits of Rmb 40bn ($87bn).
“This growth clearly caught the authorities by surprise, with a Huijin vice-chairman admitting to the South China Morning Post that ‘the emergence of Alibaba’s Yu‘E Bao online money market fund has prompted the authorities to speed up reform in the financial sector,” continued the newsletter. [Hujian is the holding company that controls China’s state-owned banks]
It is the state-owned banks that have so badly misallocated capital, particularly since 2009, because of their all-too cosy relationships with the state-owned enterprises (SOEs).
As the newsletter’s authors point out, the SOEs are a minority shareholder in Hujian. This can be compared to the moral hazard of, say, Shell and ExxonMobil being allowed to actively manage the lending decisions of the banks that lend them money.
The state-owned banks have, as result, traditionally shovelled enormous amounts of very cheap finance to the SOEs, regardless of whether there was any realistic prospect of a decent return on the loans.
How have the state-owned banks been able to afford to do this? All of them have been allowed to offer the same very low interest rates on deposits.
This has limited the growth in consumption because of the poor returns enjoyed by savers, who, up until very recently, have had no alternative but to leave their money in these low-yielding accounts.
But Yu’E Bao is now one such alternative – and is entirely in keeping with the pledge by China’s new leaders to let “market forces” play a “decisive role” in the economy.
Thus, sooner than many people think, state-run lenders could be forced to offer competitive savings rates – because of the “bottom-up” pressure being exerted by Yu’E Bao and other similar services.
The consequences for the chemicals industry will include:
- State-owned Sinopec will no longer have as much access to preferential lending. It will thus be forced to be much more discriminate about how it invests.
- More plentiful finance will become available for China’s small and medium-sized enterprises (SMEs), which form the bulk of the country’s chemicals and polymers buyers. (They have been at the “back of the queue’ for lending from the state-owned banks – and thus have had to resort to risky and expensive borrowing from the shadow-banking sector. The emergence of the toxic shadow-banking sector is another consequence of the harmful links between China’s official lenders and its SOEs)
- But this extra finance will only be available for the good SMEs – the ones adding value to China’s economy, because market forces are now firmly in play. Low-value plastic converters, and other chemicals consumers belonging to China’s old economy, will continue to go bust.