Inside Business

April 15, 2014 4:56 pm

Tech groups transform how finance is done in China

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The internet is making the country a much fairer place

Sometime soon, the newly formed though not yet formally named association of internet finance companies will receive official approval from Beijing. That is the view of Tang Ning, one such financial entrepreneur and the founder of Creditease, a peer-to-peer lending platform. It is a sign of how far the sector has come in just a few short years.

The internet is transforming the Chinese mainland. And nowhere are the changes more dramatic than in the financial sector. China’s top leaders talk about reform, enabling private entrepreneurs, and changing the way capital is allocated away from the state-owned enterprises that still absorb the bulk of credit (though they account for an ever smaller part of output).

Yet it is the internet that is finally making China a much fairer place. “In the past, it was only the princelings that had early access to opportunities,” says tech hedge fund manager Richard Ji of All-Stars Investment, and a former tech analyst for Morgan Stanley in Hong Kong. “Now ordinary people do too.”

China’s leaders call on the big state-owned financial institutions and their foreign partners in so-called village banks to lend to small and medium-sized enterprises. Financial inclusion has become a buzzword in China, as it already is in India. But, in fact, it is the internet entrepreneurs who are actually doing the most interesting things to change the way credit and investment work in China.

Mr Tang is one face of this quiet transformation. The heart of Mr Tang’s business is to bring those with excess cash together with those who need it, with both sides receiving better rates than they could otherwise do. (Because he simply provides the platform, Mr Tang does not have or believes he requires any government licence.)

The money finances small start-ups which do not qualify for bank loans, such as a beauty salon or a car-washing business. That, in turn, has led Mr Tang to work with equipment makers and diversify into micro-leasing, an area too small to be of interest to state-owned enterprises. In another example of his expanding reach, he is making tuition loans available for vocational training and partnerships to develop online curriculums for those in need of practical education.

Bao Fan is another face of this transformation. While the traditional securities firms, such as Citic Securities and Haitong or now private equity-owned CICC, scrap over the business of listing the shares of state-owned companies in China or in overseas markets, Mr Bao dwells in a different world.

Mr Bao’s clients are the tech entrepreneurs of China. His company, China Renaissance, is a merchant bank which invests in and provides traditional securities services to new economy groups. Mr Bao was, for example, the financial adviser to ecommerce company in its recent strategic partnership with Tencent and will have a role in listing JD when it goes public in May.

Indeed, companies such as Alibaba and Tencent are doing more than any edicts from Beijing to transform how finance is done in China. These technology firms are collecting money from their customers and placing it in money market funds that can command high rates because of the volume. Less than a year after it started taking deposits, one single online money market fund – Alibaba’s Yu’e Bao (“Leftover Treasure” in Chinese) now has more depositors than the total number of equity investors in China. They are also disrupting the traditional (and under-developed) bank payment systems, and killing the fees the banks have gleaned from such services.

The customer base of these tech companies is staggering. Haitong has 4m customer accounts, Mr Bao estimates, while the Alipay unit of Alibaba has 180m active accounts.

To some concerned officials, some of the tech companies’ forays into finance resemble a Ponzi scheme in which earlier customers get repaid from the inflows of later customers and may end badly. Regulators – perhaps surprisingly – seem willing to tolerate the encroachment of the tech companies, believing that they will force the state owned banks out of their lethargy.

At the same time, barriers to entry are coming down. “China is opening up the securities industry,” Mr Bao says. “Even private companies can get securities licences now. I will kill competitors through the internet.”

That may or may not be wishful thinking. But Mr Bao is right when he talks about “the revenge of the private sector.” It is long overdue.

Henny Sender is the Financial Times’ chief international finance correspondent

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