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UPDATED: April 16, 2014 NO. 12 MARCH 20, 2014
A Conflict of 'Interest'
As Internet finance continues to expand its reign, supervision of the industry is imminent
By Deng Yaqing

According to statistics, the bulk of the money collected by those Internet financial products are invested in agreement deposits with an interest rate that can be as high as 10 percent. If banks are caught in money shortages, which usually occur at the year-end when people tend to withdraw their deposits and when the central bank and China Banking Regulatory Commission set out to do checks, they would turn to these monetary funds for money to fill the gap. As more and more bank customers move their deposits to Internet financial vehicles like Yu'ebao, banks will see the money scarcity intensified.

The banking sector is being forced to think hard about interest rate liberalization.

Yang Kaisheng, former President of the Industrial and Commercial Bank of China, believed that interest rate liberalization would allow banks to decide the cost of absorbing deposits according to their assets and liabilities, capital adequacy ratio as well as development strategies.

"If Yu'ebao still exists after interest rates for banks are liberalized, its earnings ratio will be analogous to the rate of demand deposits," said Yang.

Moreover, Internet finance has spilled over into almost all sectors, not just the banking realm.

"With high interest rates, Internet financial products have pulled a significant strand of customers into transferring deposits from their saving accounts. That will substantially increase the financing cost for enterprises," argued Liu Liehong, President of China Electronics Corp., a sentiment echoed by Cao Dewang, Chairman of Fuyao Glass Industry Group, who worried that higher lending rates would cause the growth of China's manufacturing industry to stumble.

Nonetheless, Zhang Xiaoji with the Development Research Center of the State Council believes Internet finance needs support from the manufacturing sector. "If there is no producer, how can Taobao vendors keep their businesses running? The market will end up striking a balance between the two."

Pan said that people should not set Internet finance against the real economy, as the former can expand funds supply to small and micro-sized businesses, diversify financing channels, improve transaction efficiency, and reduce trade costs.

Supervision imperative

Wealth management products like Yu'ebao and Licaitong, a similar product launched by China's Internet giant Tencent, are just one sort of Internet finance, an area which also comprises Internet payment, peer-to-peer lending, micro-loans, crowd funding, online marketing of insurance and fund products, etc.

Some Internet financial companies had dabbled in the fields that exceeded their capacity of risk management and control, which would breed an array of financial dangers, warned Yan Bingzhu, Chairman of Bank of Beijing.

"The government should reinforce the legislation for Internet finance, and make clear the rights and duties of trade subjects, requirements for market access, and the standards of transaction behavior," said Yan. "Efforts should also be made in ensuring fair trade, establishing the credit system, and protecting consumer rights."

Pan also held that the supervision of Internet banking needs to be further upgraded and standardized. "Different approaches should be taken to tackle different Internet financial products. Supervision should be reinforced for products with high risks and be moderately reduced for those that have already become full-fledged. Meanwhile, different oversight departments should be coordinated to supervise financial products," said Pan.

In addition, market-oriented reforms, such as relaxing price regulation in the traditional financial sector, should be pushed forward, while market access should be expanded to admit more micro-sized financial institutions and private capital into the financial market, said Pan.

Email us at: dengyaqing@bjreview.com

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