China’s Financial Repression and Alibaba’s Banking Arbitrage

Monday, April 13, 2015

There’s much stock market excitement about the various Chinese internet companies, Alibaba, Tencent, Xiaomi, and their move into what is essentially online banking. Will they be able to capute significant percentages of the market, just how dang big is that market anyway and which of them is going to do best? We, here at this particular part of Forbes, don’t do technology nor stock markets, but macroeconomics. And truth of the matter here is that all of those things are going to depend upon the Chinese Goivernment’s macroeconomic policy making. Specifically, how much are they going to relax the country’s current financial repression and how much are they going to allow these companies to arbitrage around it? Absolutely nothing else is going to have an effect as large as that one single decision.

Here’s Fortune on the speculation:

The newest tech war in China has begun.

The opening of Tencent’s online WeBank earlier this year was attended by Premier Le Keqiang. Smartphone maker Xiaomi just announced a new money market fund that triples the yield you could get at a state-owned bank. And Alibaba Group Holdings Ltd’s finance affiliate said yesterday it expects its online bank to open sometime in June.

The most important part of their report is this:

Online banks are a new thing in China, and tech giants including Alibaba, Tencent Holdings Ltd, Baidu Inc. and Xiaomi have all worked to secure banking licenses in order to take on the country’s stodgy big four state-owned banks that are known for paying low rates and offering few investment options for average customers.

And the most important part of that is the second part of the sentence. Why do the big four banks offer such lousy interest rates and so few products?

This is actually what is known in the economic jargon as “financial repression”. China doesn’t have much in the way of a social security net. Pensions and health care have to be, largely at the very least if not in full, paid for out of personal savings. Thus the savings rate in the economy is just massive: some years as much as 50% of all GDP is saved (by contrast, for the US it’s about 8% this year and that’s a strong rise in recent years). The financial repression part means that the government deliberately insists that savers shouldn’t have all that many decent places to put such money. The interest paid on bank deposits is controlled by law and is almost always less than the inflation rate. Savers thus lose money by leaving it in the bank.

Source: Forbes (link opens in a new window)