Online finance - angel or devil?

On Wednesday morning, online finance product Yu'ebao handed out 1.43 yuan for each 10,000 yuan (1,626 U.S. dollars) of investment to its users.

This represents an annualized interest rate 5.37 percent, much higher than the current benchmark deposit rate offered by banks of 3 percent, but it is not the highest among similar products.

Though adored by an exploding number of customers, online finance products are under scrutiny by banking regulators and commercial banks are fighting for deposits they used to own.

Experts at Boao Forum for Asia seem to believe that the likes of Yu'ebao are neither angels nor demons, and regulation will lead to development of both traditional banking and innovative "wealth management".

Justin Yifu Lin, economist and professor with the National School of Development at Peking University, told a panel discussion on Wednesday that online finance will help both people and economic growth, to some extent. Since Alipay launched Yu'ebao in June 2013, plenty have followed suit with similar products. As more and more clients transfer deposits elsewhere, banks are also cobbling together high interests products.

Yu'ebao customers invest in a money market fund and make handsome profits from their balance while enjoying the liquidity of demand deposits. More than 81 million users had deposited 500 billion yuan by the end of February.

Alipay said last month that Yu'ebao offers a way of collecting small amounts of money from customers to raise the total funds available in the real economy when those small amounts enter the financial system.

"However, online finance will not resolve all of China's problems," Lin said. Online products mainly support consumption and small and medium enterprises, rather than helping technological progress and industrial upgrades, crucial for sustainable growth.

The country needs diverse financial services to meet the needs of different industries, Lin said. Chen Zhiwu, a professor of finance at Yale School of Management, said online finance is conducive to inclusive growth, but its significance is over exaggerated.

The explosive growth of Yu'ebao is not just a result of integrating the Internet with finance, but of supervision loopholes, according to Chen.Regulatory authorities had lagged behind, but moved to keep up last month.

In mid-March, the central bank stepped up supervision for online finance and suspended virtual credit cards and payments via code scanning, which involved Alipay and Tencent, another Internet company with finance products.

In response to deposit outflow, four state-owned banks have lowered their limits for transferring money to Alipay via mobile phone apps for each transaction, each day and each month.

The Industrial and Commercial Bank of China, the largest by market value, lowered the daily limit from the previous 50,000 yuan to only 5,000 yuan and the monthly limit from 200,000 yuan to 50,000 yuan at the end of February.

"We should set some basic requirements and thresholds for the development of online finance to avoid unfair competition," Yan Qingmin, vice chairman of the China Banking Regulatory Commission said.

The government should adopt different supervision measures for different products, such as wealth management and peer-to-peer credit. It should also coordinate regulations and make innovations to suit the newreality, he said.

Ma Weihua, chairman of the Hong Kong-based Wing Lung Bank Ltd., said that before online finance products can rule out associated risks, "a more cautious attitude in supervision is no bad thing."

"All client materials and information are put online, so there are great risks from hacker attacks and Internet failures," Ma said.

Supervision should prioritize Internet security, especially the security of user information, he said.

"Authorities should act as if they were training children to get rid of their bad habits and allow them to grow up healthily. Nurturing and protection are needed during the process," Ma said.

Established in 2001, the Boao Forum for Asia is a platform for government, business and academic leaders in Asia and other continents to share opinions on pressing issues in the region and the world. It runs from Tuesday to Friday under the theme of "Asia's New Future: Identifying New Growth Drivers."