Time to show more online interest

Since its launch in June 2013, Yu'ebao has attracted more than 81 million users, with aggregate deposits of about 500 billion yuan ($81.5 billion). Other platforms also jumped into the game and soon the market was awash with similar products from Baidu Inc and Tencent Holdings Ltd.

Most of the money raised by products like Yu'ebao are reinvested in banks as contracted deposits, and thus allow depositors to enjoy a higher interest rate than regular deposits.

What has made the banks apprehensive is the fear that all of their regular deposits may become higher-rate contracted deposits and erode their advantage in attracting deposits at artificially low rates.

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To tackle the competition, banks, even big State-owned national lenders, have increased their regular deposit rates to the upper end of the floating band, something they rarely did before the band was introduced.

The banks are apparently unhappy about this development, and have instead chosen to pin the blame on Internet finance, claiming that because the sector is outside the ambit of regulation it would lead to higher leverage levels and greater risks for the banking sector. Whether these accusations are fair is open for debate, but one thing is without doubt. That is, Internet finance has shed light on the unreasonable existence of the dual-track interest rate system and banking monopoly.

China has two sets of interest rates. The first set of rates, controlled by the government comes in the form of the deposit ceiling. The other is the set of interest rates determined by market players in a rather free manner.

Banks can attract deposits at a government-set annualized rate of about 3 percent, but fund managers have to raise money from investors at a market rate of about 8 percent. The gap means that banks, which already monopolize banking resources, can automatically enjoy an interest gap of 5 percentage points. They can lend the money to other lending agents such as fund managers to make net interest gains with ease.

Such a situation resulted in other market players having to pursue even higher return rates to stay afloat. With better and stable returns, the property market and government-backed fixed-asset investment projects naturally become the investment darlings. Because most of the credit went to these two sectors, asset bubbles and government debts ballooned, leaving many small businesses and real-economy sectors in the lurch. What this meant was that small businesses would need to pay interest of more than 20 percent to get financing.

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