Yu’ebao has recently cut its maximum holding ceiling for individuals. This move is likely to benefit the company and most investors.
Tianhong Asset Management Co., which manages Yu’ebao, the Alibaba Group’s investment fund service has become the largest domestic assets management company in the world. According to the latest report by Ant Financial, Yu’ebao was managing RMB5.1 trillion (approximately US$774.2 billion) worth of investments by June 2017. It had also garnered more than 300 million users by the start of 2017.
How Yu’ebao works
When a user deposits funds to Yu’ebao, Tianhong will register the user’s deposit. The management company would then invest the funds on the user’s behalf and alert the user once his/her investment has yielded some profits.
Yu’ebao does not only provide investment services but also allows users to make payments and transfer money to other users. These other features are available because Alibaba has synched Yu’ebao and Alipay, a widely used e-payment platform in China. Users can access Yu’ebao via the Alipay mobile application and use the funds stored in their Yu’ebao account to pay for online shopping purchases.
A lower maximum holding ceiling for individuals
While the Yu’ebao platform has many features, Yu’ebao is still primarily an investment fund, and like all other investment funds, users deposit money at their own risk. To minimise this risk for users, Yu’ebao has capped the maximum holding ceiling for individual accounts to RMB100,000 (US$15,042). This new limit has been in effect since August 14.
Yu’ebao has adjusted its maximum holding limit before. Earlier in May, Yu’ebao reduced the upper limit from RMB1 million (US$150,376) to RMB250,000 (US$37,604) for individual accounts.
After this latest reduction in August, Yu’ebao has announced that it does not intend to reduce the maximum holding limit any further.
The reduction has little negative impact for most users
For one, existing users with Yu’ebao balances below the maximum holding cap will still be able to transfer funds into their accounts until they have reached the new limit. According to Wang Qunhang, Deputy General Manager at Jian Financial Information, the average Yu’ebao user falls into this category. He stated that 99.72% of Yu’ebao accounts belonged to individual investors and the average holding fund was RMB2,490 (US$375).
Additionally, users with Yu’ebao balances exceeding the new cap will not be forced to transfer the excess funds out of Yu’ebao. They will also be able to enjoy the profits earned from their current balances. Yu’ebao has only forbidden them from transferring more money into their existing accounts. The new ceiling would only apply after these users withdraw any amount of funds from their account that would bring their total balance to under the new maximum holding ceiling.
Yu’ebao benefits from this reduction
Yu’ebao’s extraordinary growth has come at an enormous operating cost. Tianhong has estimated an RMB7.1 billion (US$1.1billion) spending on its supervision and regulation department. Such an operating cost is large, but necessary given how fast Yu’ebao has grown. According to Ant Financial, in the 1st Quarter of 2017 Yu’ebao recorded RMB1.4 trillion (US$0.2 trillion) in net assets. By the 2nd Quarter, it recorded an RMB300 billion (US$45.1 billion) increase in net assets.
Tianhong is under large pressure to manage these funds and in such circumstances, setting a deposit limit for investors might help the company better manage its growth. This limit would help it ensure that its processes can keep up with user demand. The ability to keep up with user demand is important as Yu’ebao relies on its reputation for stability. Its investment schemes do not have the highest return rate among the same financial products in its field, but because of its reliability, it has attracted many users.
This limit is also unlikely to impact Yu’ebao’s popularity for now. While this limit might deter big investors, Yu’ebao mainly attracts investors who have low to medium salaries. One-third of Yu’ebao’s 300 million users are residents of rural areas. Yu’ebao has cemented itself as the investment management tool for the lower and middle classes, and the current investment limit it has set would not deter them.
In the long run, lowering the holding amount of the personal account might make it easier for users to withdraw their investments if they feel Yu’ebao is no longer profiting them.
Nonetheless, lowering the ceiling seems like a wise move on Yu’ebao’s part. If it wants to ensure continued growth, it must strengthen its processes and regulations first.