Liquidity risk
Strictly speaking, this means Alibaba isn’t taking the liquidity risk that banks face if depositors decide to withdraw their money en masse. That is why it doesn’t need a bank deposit-taking licence, and avoids onerous regulation from the central bank.
But Alibaba is straying into a grey area. China’s immature financial industry still hasn’t been through decisive tests of who takes responsibility when investments go wrong. For Alibaba, this risk may be heightened. Its users are young and financially unsavvy Ñ Yu E Bao savers have an average age of around 28 Ñ and trust for Alibaba’s brands runs high, thanks partly to founder Jack Ma’s self-styling as a champion of the little guy.
Even if Alibaba has no explicit responsibility to pay back investors, it may decide to do so to protect its reputation. The situation with Yu E Bao is further complicated by the fact Alibaba owns 51 percent of Tianhong, the fund management company that structures the products.
For now, Alibaba and its online rivals are more of an annoyance for banks than a real threat.
But while Alibaba is decidedly not a bank, the biggest risk is that customers treat it like one. If that happens, it’s a fair bet regulators will too.
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