Risk factor

Despite its enthusiastic embrace by investors, Yu'ebao does face uncertainties. Foremost among them is regulatory limbo. It hasn't yet been cleared by the China Securities Regulatory Commission, the industry watchdog, although company spokespeople said the requisite paperwork has been submitted, and Yu'ebao risks fines or even forced closure if it doesn't pass that process soon. But observers believe 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, we think the general public users are aware of these risks, however small they may be."

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

Excellent timing

Until now, there were few clear-cut, ostensibly low-risk, investment vehicles besides the bank-offered wealth management products 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. Alipay's Yu'ebao, with an attractive yield, immediate liquidity and no limit on deposits, seemed irresistible. All a user has to do is click a button to transfer idle cash sitting in their Alipay account into the fund, and click another button to transfer it back.

"Reaching 100 million (Yu'ebao) users is conceivable," Li Xiaohui, a researcher at China Security News, said, citing Alipay's 500-million-plus user base. "It's an easy process that seems hard to refuse. The money is just idle in your account, so 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 Yu'ebao continues to tempt Alipay users into transferring at least a portion of their balances into the fund, it won't 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 it could quickly move into the space," Kapron said, clarifying that he doesn't expect Yu'ebao or its imitators to impact the popularity of banks' wealth management products, because most Yu'ebao deposits come from idle Alipay funds, rather than "large amounts of money in the short term."

Currently, it's not possible to withdraw Yu'ebao 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 Wang Bowen, who plans to continue using the platform ahead of any other investments. "Yu'ebao meets the needs of the people," Wang said. "Although it is more risky than deposits, considering the rate of return and the liquidity, the risk is acceptable."

The author is a copy editor of ChinAfrica magazine.

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