The latest quarterly report from Alibaba affiliate Yu’E Bao indicates that the world’s biggest money market fund is channelling the vast majority of its capital into bank deposits and settlement funds
According to its Q2 report Yu’E Bao has placed approximately 1.19 trillion yuan, or 83% of its 1.43 trillion yuan in total holdings, in either bank deposits or settlement funds.
The Q2 figures marks a massive increase compared to the first quarter, when Yu’E Bao held 734 billion yuan in bank deposits and settlement funds, comprising 64% of approximately 1.14 billion yuan in total investments.
In the second quarter Yu’E Bao increased its investments in bank deposits by over 455 billion yuan, while the scale of total investments increased by only 290 billion yuan.
This means that in the second quarter Yu’E Bao made a sizeable net contribution to funds in the Chinese banking system.
Domestic analysts have said that Yu’E Bao is essentially acting as a “two way merchant” who is recycling the funds of retail investors. Investors in the money market fund are first transferring their bank deposits to Yu’Bao, before Yu’E Bao then re-deposits them back into the banking system.
This translates into a dramatic increase in the costs of funds for banks themselves, as Yu’E Bao engages in a game of two-party arbitrage.
Given the 4% interest spread on the 1.2 trillion yuan in bank deposits and settlement funds, analysts estimate that Yu’E Bao is costing nearly 50 billion yuan a year in earnings from Chinese banks.