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DJ PBOC Official: Banks Should Hold Reserves on Yu'e Bao Deposits
05 May 2014 14:59
DJ PBOC Official: Banks Should Hold Reserves on Yu'e Bao Deposits

BEIJING--Bank deposits invested by China's money-market funds, including the hugely popular Yu'e Bao, should be subject to reserve requirements just as traditional bank deposits are, a central bank official said.

In an opinion piece published Monday in the central bank-backed Financial News, Sheng Songcheng, head of statistics at the People's Bank of China, repeated a call for making reserve requirements apply to money-market funds--just like the nation's banks--though he said reserves should be made indirectly.

Funds should be parked with the central bank by the commercial banks that hold funds on behalf of these investment companies, he said.

Mr. Sheng said the annualized return of Yu'e Bao would be reduced by one percentage point if there were a 20% reserve requirement on the portion of its money placed as deposits with banks. Major banks need to keep 20% of their deposits in reserve.

Alipay, an affiliate of Alibaba Group Holding Ltd., launched the popular Yu'e Bao fund in June last year. It has already attracted over 400 billion yuan ($65 billion) in investments under its management and its success has prompted rival technology firms Tencent Holdings Inc. and Baidu Inc. to offer similar products.

Yu'e Bao now offers a return of about 5% to investors, well above the maximum 3.3% that banks can offer on a one-year fixed deposit.

Under current rules, Chinese banks are not required to set aside reserves for deposits from most other financial institutions, including fund management firms. These deposits are typically restricted to use in loans to banks and other financial institutions. They also are not included in the loan-to-deposit ratio that covers other deposits from individuals and nonfinancial enterprises.

"Deposits from [investment] company funds are not subject to bank reserve requirement management, which is the main reason for Yu'e bao attaining such high returns," said Mr. Sheng in the article.

Grace Zhu


(END) Dow Jones Newswires

May 05, 2014 02:58 ET (06:58 GMT)

Copyright © 2014 Dow Jones & Company, Inc.

Source: Dow Jones

a good step to protect the holders of such product. Otherwise, whenever there is a problem, no money is reserved to compensate the holders.

Indeed they should be regulated as retailers chase high returns without consideration to risk, especially when it is fronted by renowned brands. But as usual the devil is in the details

AFAIK Yu'e Bao is nothing but an agent for money market funds ie fund managment companies. The shocking part to me is that they allow redemption and subscription on the fly. That makes no sense operationally and it can easily cascade to a flash-crash. Efficiency, which is much easier to calculate, without effectiveness can be detrimental.

Secondly how are these money market funds regulated?

IMHO requiring them to have reserve ratio blurs the line between asset managment and banks. I think they should have 1) a longer settlement period so people know their money is not so easily assessible and hence prescribe a risk factor to it for eg 3-7 days settlement. 2) an acredited investor scheme such that it is the onus of both the agent and investor to declare that the investors are knowledgeable about these products with penalties for incorrect declaration 3) regulate the instruments that these money market funds can invest in to normalise their return profile commensurated with risk. Mandatory disclosure the NAV fluctuations of these funds which their deposit returns are tied to when they want to invest.

End of day cultivate a caveat emptor environment yet prevent unknowing (and greedy) retail public to be scammed. When the music is on, nobody complains. Only when the punch bowl is taken away that regulators and public money have to clear the mess. The problem is always asymmetric risk.