China points to the financial future


Last time I was in Beijing, I stopped to buy some sausages from a street vendor outside the Forbidden City.  They cost only a couple of yuan, yet the lady selling them was happy to take payment on her phone using the Alipay app.

I don’t know what she did with the proceeds. But she might well have deposited them into Alibaba’s Yu’e Bao money-market fund or another wealth-management product – all with a few swipes of her smartphone. Today, most Chinese people take financial technology – fintech – in their stride. In 2018, it will become even more integral to daily life.

Rapid growth through red envelopes

China’s fintech industry has come very far, very fast. Online payment provides the clearest example. These days, if you want to go for a meal, you can order and pay on your phone, turn up to the restaurant at the appointed hour and enjoy your dinner – without touching physical money or menus.

The Chinese online-payment industry already accounts for around half of global transactions. Alipay, operated by Alibaba’s financial arm, is the market leader. But Tencent’s Tenpay has been catching up fast. Tenpay’s stroke of genius was to allow its users to send electronic hongbao – the red envelopes of money given as Chinese New Year gifts. Some 16 million online hongbao were sent in 2014 – rising to a billion in 2015. This helped Tenpay’s share of the online-payment market reach around 40% in just three years. Tenpay’s rapid rise shows that we shouldn’t rush to write off smaller payment players – so we could see surprises in 2018.

My sausage-seller could transform her earnings into investments through her phone.

But there’s much more to fintech than online payment. Chinese consumers are using mobile technology to borrow and invest. And alongside peer-to-peer lending, business-to-business finance is now taking off, with fintech firms offering cash and liquidity management for companies – filling gaps left by the cautious state-owned banks. Integration between online payment systems and wealth-management products is increasing – which is why my sausage-seller could transform her earnings into investments through her phone.

Wealth-management products should grow rapidly in 2018. A fifth of Chinese adults still have no bank account; with yields on bank deposits low and the A-share market notoriously volatile, many are likely to leapfrog that stage and go straight to wealth management.

Much more to come

One factor that’s helped fintech’s rapid ascent is the extent of smartphone penetration. Around 60% of Chinese people owns a smartphone: not necessarily an Apple or Android product, but a local model – Huawei, Xiaomi or Opal. But although Chinese smartphone ownership matches Germany’s and is higher than in Japan or France, it still trails South Korea’s by some margin. As smartphone ownership grows, so too will the market for fintech products.

In 2018, those products will cover a wider range of financial services. Fintech firms are looking not only to disrupt banking, but to compete with insurers and property companies. Alibaba is expanding into housing rentals, allowing customers to undertake every stage of the process through its apps. Meanwhile, Tencent has received a licence to start an insurance company.

Relaxed attitudes facilitate fintech

Consumer attitudes are boosting the fintech boom. Surveys show that Chinese consumers are more relaxed about personal data than their Western counterparts. This facilitates the monetisation of information by fintech companies, making their business models more viable – even as fierce competition keeps transaction fees low.

Another supportive aspect is readily available credit for fledgling fintech firms. Lots of venture-capital companies are willing to invest, and abundant liquidity means that start-ups can thrive. This has intensified competition, which will leave the eventual victors in great shape.

Going global

We expect the regulatory environment to remain benign in 2018. Although there has been some intervention to stamp out malpractice in peer-to-peer lending, the Chinese authorities seem content to let competition play out – a positive attitude that may reflect China’s global lead in fintech.

And that global lead looks set to continue. China’s fintech giants are now expanding overseas. Alibaba has established joint ventures in Hong Kong and Indonesia, and is investing in India, South Korea and the US. It’s also setting up a global research academy, with labs in the US, Russia, Israel and Singapore. Meanwhile, Tencent has been investing in Indian e-commerce and building partnerships in Thailand, South Africa and Europe. As 2018 unfolds, we’re increasingly likely to associate fintech not with Silicon Valley, but with Beijing, Shenzhen and Hangzhou.


The article above was previously published on Aberdeen Asset Management’s ‘Thinking Aloud’ blog on 20th December 2017