Banks, online funds battle for larger share of savings

However, Niu's call for ban encountered strong resistance both online and offline.

In respond to Niu's claim that Yu'E Bao's fees actually add up to 2 percentage points more than its stated charges, the fund said its management fee is only 0.63 percentage point.

For their part, customers said they'd still put their spare cash to Yu'E Bao rather than bank deposits, despite the recent decline in return rates, because it's still a better deal than the annual fixed deposit rate of 3.5 percent.

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Lin Caiyi, chief economist with Guotai Junan Securities Co Ltd, said the popularity of Yu'E Bao reflects more than just its higher return. It's also a function of easy access and convenience in shopping and payments.

"It is the choice of the market, and it is the most efficient."

The current scale of money market funds, at nearly 1 trillion yuan, is a mere 2 percent of the 48 trillion yuan in total personal savings, though experts said the industry is still in its infancy.

Yi Qiang, managing director of the Shanghai-based Tebon Fund Management Co Ltd, said the development of China's money market funds in recent months was similar to that of funds in the United States in the 1970s.

"There was explosive growth during the reform process, with a move from regulated interest rates toward liberalized interest rates," he said.

Banks in the US also sought to block the development of money market funds.

The trouble in the US was, these funds drove up capital costs, and banks that were subject to regulated interest rates ultimately failed.

Yi said that the scale of US money market funds didn't shrink until interest rates were fully deregulated in the 1980s.

"In my view, there will be another five to 10 years of rapid development for money market funds in China, and during the process, some small banks that aren't able to control their capital costs will inevitably close down, just like what we saw in the US in the 1980s," he said.

But Xu said with more money market fund companies joining the party, and tougher regulations in the pipeline, the funds themselves will also face more competition.

The "operating abilities of money market funds will be tested, because short-term financing tools offered by banks will be more of a choice in their investment portfolio.

"In the meantime, due to the similar return rates they offer, brand recognition will also be a key factor in the competitiveness of the fund companies," he said.

"Eventually, it will be an oligopoly market, with only major players," Xu said.

 

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