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China to promote healthy development of Internet finance

China will promote the healthy development of its burgeoning Internet finance, according to a government work report delivered by Premier Li Keqiang on Wednesday.

"We will promote the healthy development of Internet banking," Li said at the opening of the annual session of the National People's Congress (NPC), China's top legislature. This is the first time that Internet finance has been written into the government work report.

Financial products like Yu'E Bao, invented by e-commerce giant Alibaba's online payment arm Alipay, have been instant hits among the Chinese public.

Chinese people have pulled money from traditional banks, which offer a maximum 3.3 percent interest rate for one-year deposits, and moved it to web-based money market funds like Yu'E Bao, which offers a seven-day annualized yield of nearly 6 percent.

The better interest rate enabled Yu'E Bao to attract 81 million users with aggregate deposits estimated at around 500 billion yuan (81 billion U.S. dollars) in just eight months.

Commercial banks have felt the pressure. The state-backed "Big Four" launched a host of quasi-Yu'E Bao products, trying hard to retain prospective depositors.

"Being zero-cost and convenient, Internet finance adapts to and satisfies social demand, and fills a gap that the traditional banks do not care to look at," said Kuang Xianming, head of the economic research center at Hainan's China Institute for Reform and Development.

Kuang called Yu'E Bao "an example of innovation shaped by market forces." This is echoed by Ma Weihua, former president of China Merchants Bank who is in Beijing for the annual session of the National Committee of the Chinese People's Political Consultative Conference.

Ma considered the popularity of Internet finance fully understandable, as its low threshold is quite a lure for those living away from cities or practitioners of small or micro businesses.

Although Yu'E Bao and its peers are nimble and attractive and filled an important innovation gap, experts have warned that they are not risk-free and should be regulated to avoid any adverse effect on the general economy.

China International Capital Corporation said in its latest research note that Yu'E Bao has placed 92 percent of its assets in interbank deposits and used the different terms of maturity between investors to reap high interests.

"As the assets of Internet finance products like Yu'e Bao increase, so will their liquidity management pressure," said Lyu Suiqi, deputy dean of the finance department at Peking University, adding that such money funds rely too much on interbank deposits for high interest.

Their ability to bargain with traditional banks will weaken as market liquidity improves and more competitors enter the race, he said.

The Internet finance debate has drawn attention from the country's top legislators and political advisors even before the annual sessions started, with some reportedly bringing proposals on its regulation.

In response, Zhou Xiaochuan, governor of the central bank, said on Tuesday that China will not ban Internet finance, but will improve regulations in the area.

"Improvements must be made in existing policies, supervision and regulation as they cannot cope with new things such as Internet finance and guide its healthy development," said Zhou.

Li Dongsheng, an NPC deputy and head of TCL Corporation, one of China's leading consumer electronics makers, said the word "healthy" in the premier's report delivers a signal to regulate and guide the development of the booming sector.

"A key task for regulators is to direct funds raised by Internet companies into the real economy," said Mei Xingbao, a political advisor and former president of the state-owned China Orient Asset Management Corporation.

Mei suggested a solution to match the Web-based funds with specific projects, like those in environmental protection and new energy, but added policy support might be necessary in this regard.

In Wednesday's report, the government also suggested that financial services should better serve the real economy.

"We will ensure that financial services play an active role in meeting the needs of the real economy, including small and micro businesses, agriculture, rural areas, and farmers," Li said.

[Source: Xinhua, Beijing, 05Mar14]

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