China: Internet Finance Crisis

IS CHINA IT'S OWN WORST ENEMY?

With China being the home to the world's biggest banks it would be hard to believe that the country could be facing a financial crisis. The Chinese financial sector is heavily protected, making it very hard for potential intruders to wreak havoc. However, it is the same financial sector that is currently under attack from online funds which are much higher than that which are allowed on conventional deposit accounts at regulated banks.

With China making a cap on deposit rates it causes the money to flood into shadow-banking products which are offered by "trust" companies in search of higher yields. Alibaba, an e-commerce firm allows it's customers to invest money parked in their accounts at Alipay an online payment service. Even though Alibaba was launched last June it has already made up to 400 billion yuan ($65 billion). Since then other firms such as Baidu (online search firm) and Tencent (makes online games) have entered the fray showing how much of a growing threat these online firms are becoming.

Many see these online firms as a long term threat to the banks and the governments ability to control the financial sector. Observers see signs of a looming regulatory crackdown in attacks by the official media; a financial editor on the state tv had recently branded the online financial firms as parasites and vampires.

The question is whether or not will lead to a massive disruption in the sector? It might, but as far as we know with the increasing growth of the online financial firms anything could be possible.