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Bankers see Alibaba as biggest competitive threat

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19 Jul 2013
Week in China

Jack Ma, founder and chairman of Alibaba, China’s largest e-commerce group, is known to be an outspoken critic of the state-owned banks. That view prompted his move into finance in 2004, when he developed the online payment system Alipay to help consumers buy products from his own sites and across the internet. In 2009 Ma also started a service called Ali-loan, a partnership with some of the banks to help small businesses access loans.

"Banks should support small- and medium-sized businesses. But the banks can't, for whatever reasons," he observed last year.

That sentiment was echoed again in a recent interview with the People’s Daily: “China’s financial industry, especially the banking industry, only serves 20% of clients, and I see there are 80% of the clients are not covered. Financial services should be about serving the layman, rather than playing inside your own circles and making money yourself,” says Ma.

To that end, Alibaba announced last week that it has partnered with Orient Securities Asset Management to sell asset-backed securities based on loans that Alibaba has provided to small businesses using its e-commerce platforms. The plan, which has won approval from the CSRC, the securities regulator, could generate a 6% return annually for investors, underpinned by repayments on the loans.

The loans that Alibaba offers are all for small and micro enterprises, which is something that the government wants. Traditional banks usually cater to state-owned enterprises

Alibaba says total issuance of the securities will reach Rmb5 billion ($813.9 million).

What are the implications? The move will help Alibaba’s loan programme grow quickly, as well as allow investors to access a higher-yielding and diversified group of borrowers. WiC reported in issue 165 that Alibaba had begun making micro-loans to its corporate clients based on the cash flow data it collects monitoring their sales on its sites. It has lent more than Rmb100 billion in the last three years, with the average loan value hovering at around Rmb40,000.

Industry observers believe that investors will be keen. The average length of Alibaba’s loans is 123 days and non-performing debt amounts to just 0.87% of total outstanding loans (as of the second quarter), according to company data.

Alibaba’s latest move is good news for SMEs too, in freeing up more liquidity to provide loans to the type of smaller firm that often has trouble in obtaining traditional bank finance. “The government wants something that is more effective,” Victor Wang, a Hong Kong-based analyst, told Bloomberg. “The loans that Alibaba offers are all for small and micro enterprises, which is something that the government wants. Traditional banks usually cater to state-owned enterprises .”

The plan, which has won approval from the CSRC, the securities regulator, could generate a 6% return annually for investors, underpinned by repayments on the loans

Industry observers say that Alibaba’s financial operations are too small to have a major impact on the wider economy. But Alibaba seems ambitious in its plans to do more in the financial services industry. Late last month it also launched an online money market fund that allows Alipay users with accounts online to invest directly in a fund pegged to corporate debt and government bonds. The service, named Yu’ E Bao, became an instant hit. In just 18 days Yu’ E Bao users have reached 2.5 million, collectively depositing Rmb6.6 billion ($1.1 billion). In terms of client numbers Yu’ E Bao is already one of China’s biggest funds – and that’s with no major
marketing effort.

One reason for Yu E Bao’s popularity is that the fund can offer a forecast annual return of 3.8% (by investing in money market funds), compared to no interest when money is left in the Alipay account, or the 0.35% offered on typical bank deposits. The investment can also be withdrawn at any time if users want to pay for shopping or other bills via Alipay.

Should traditional banks be worried about the new competition? Hong Qi, president of China Minsheng Bank, which lends to small- and medium-sized enterprises, told National Business Daily that Alibaba has become its “biggest competitor”.

“We must pay attention to Jack Ma’s business model, which is something banks have never done before. The future is going to be about analysing large databases to offer responsive financial services. It will change our traditional way of thinking and our way of life,” Hong admits.

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