E-turf wars

Category: Asia, China
By Hui Ching-hoo

Online fund traders risk the wrath of the regulators

The emergence of online fund shops seems to be altering common fund trading practices in China now that the country’s e-commerce giant Alibaba Group and its largest internet company, Tencent Holdings, have broken into the niche market.

The tech rivals have paired up with leading asset managers to provide investors with high-return fund and wealth management products in a more cost-effective way. At the same time, though, this mushrooming market is mired with misleading return yields, which has prompted the regulatory watchdog to put dodgy selling practices under scrutiny.

The electronic war between Alibaba and Tencent has been heating up. The latter, which initially engaged in operating messaging services such as QQ and WeChat, has expanded its turf to the e-business space, while Alibaba is making a foray into mobile messaging and game services.

Now the battleground has extended to the online financial business. This comes as Tencent’s affiliate, Tenpay, recently joined hands with four asset management companies, including China Asset Management Corp (China AMC), to launch a new asset management platform, Licaitong, through its mobile messaging system, WeChat. The platform rolled out its first monetary fund, managed by China AMC, on January 22, offering a 7.4% seven-day annualised return – 18 times more than the lenders’ one-year fixed-deposit rate.

The move is expected to challenge Alibaba’s leading position. Alibaba is in the vanguard in terms of offering online money management products in the space. The firm’s offshoot, AliPay, teamed up with Tianhong Asset Management to launch its first wealth management product, the Tianhong Zenglibao Monetary Fund, through its investment service platform Yu’ebao, last June.

Then, in late 2013, AliPay started to provide third-party payment services for online fund sales while the first batch of 17 fund managers, including Guotai and E Fund, opened their online funds shops on Taobao, Alibaba’s online retail platform.

AliPay also put a ceiling on the amount of money that users could transfer from their Yu’ebao accounts to prevent excessive redemptions during volatile market conditions.

This innovative investment model has shown conspicuous success since, with the Tianhong Zenglibao Monetary Fund’s total assets under management ballooning to 185.3 billion RMB (US$29.4 billion) as of the end of 2013. This compares with the approximately 200 million RMB held at its inception. The spike catapulted Tianhong Asset Management from being a mid-sized asset manager to the runner-up slot among the 89 Mainland registered asset managers last year.

Tseng Ko, managing director, investment of E Fund Management (HK), tells Asia Asset Management that online fund trading has made a real breakthrough in China: “From a cost saving perspective, the internet is a very effective channel for fund managers to distribute their products compared to traditional banking networks. The market response to our online fund shop has been pretty encouraging and we’re planning to widen the distribution platform with other internet companies.”

Apart from the tech juggernauts, a number of other non-finance enterprises are also eager to get a slice of the pie. Leading PRC retail chain operator Suning Appliance, for example, was approved by the China Securities Regulatory Commission (CSRC) in January to launch its first wealth management product Ling Qian Bao with GF Fund Management and China Universal Asset Management via its third-party payment service, Yi Fu Bao.

However, Suning Appliance is unlikely to rival Tencent and Alibaba in terms of its user base and scale of business. Tencent’s WeChat has attracted more than 600 million users and Alibaba’s Yu’ebao 43 million users, amounting to aggregate deposits of 185.3 billion RMB.

Nevertheless, despite the growing popularity of online fund trading in China, the CSRC is well aware of questionable marketing techniques being employed, given that some fund managers have been talking up their fund/s returns while playing down potential risks.

The CSRC previously stated that it would strictly control asset managers and fund distributors’ marketing practices, stipulating that they must precisely disclose their products’ risk exposures and characteristics in their marketing materials.

Shanghai Tiantian Fund Sales Co, for instance, recently received a warning from the Shanghai Securities Regulatory Commission (SSRC) when it offered “100% guarantees” and “10% annual returns” in the course of selling its fund products.

Yang Wenbin, chairman at Shanghai Howbuy Fund Sales, points out that firms promising very high returns through the payment of subsidies risk the wrath of the regulators.