In September 2017, Legend Holdings paid US$1.8bn for a 90% stake in Banque Internationale à Luxembourg (BIL). It will be the largest takeover of a European financial institution by a Chinese company once the deal is completed. The acquisition follows hot on the heels of Geely’s purchase in May 2017 of almost one-third of Denmark’s Saxo Bank.
In May 2017, HNA Group raised its stake in Deutsche Bank to nearly 10% – making the Chinese conglomerate the biggest single investor in the German banking giant – and Fosun International has increased its holding in Portuguese bank Millennium BCP to 25%.
Chinese interests have been snapping up a variety of foreign assets in recent years, but these deals represent a new phenomenon: Chinese companies outside the financial services sector acquiring overseas banks.
What is the motivation for these acquisitions?
“This trend needs to be seen in the context of the fintech boom in China,” says James Kynge, emerging markets editor at the Financial Times
and author of China shakes the world
Internet-enabled technologies have been disrupting traditional banking around the world, but the far-reaching changes that innovations such as predictive analytics, peer-to-peer lending and big data represent to the financial services sector are particularly apparent in the world’s most populous nation.
Why the fast uptake?
China has the world’s largest and most developed ecommerce market, accounting for 47% of global digital retail sales, according to research company eMarketer.
Management consultant McKinsey
reports that 68% of China’s internet users made mobile payments in 2016, amounting to a total value of US$790bn – 11 times that of the US.
This has been spurred by a huge digital-savvy population in a closed digital economy. The government’s ‘great firewall’ around the internet not only restricts information, it also helps protect Chinese firms from international competition, allowing the leading domestic tech companies to adopt the latest innovations and corner huge swathes of the domestic market.
Which firms are transforming China’s financial landscape?
China’s three giant internet companies (Baidu, Alibaba and Tencent) have been aggressively creating all-encompassing platforms – such as Tencent’s WeChat app and Alibaba’s mobile wallet Alipay – to embed their services into every aspect of customers’ lives.
“The average consumer in China makes most of their purchases throughout the day – from visiting a convenience store to hiring a taxi to seeing a doctor – via direct transfers on their smartphone,” says Benjamin Cavender, a Shanghai-based analyst at the China Market Research Group. “People do not really use cash any more.”
Baidu, Alibaba and Tencent have invested heavily in emerging technologies – such as blockchain and artificial intelligence – to support the development of financial services.
Alibaba’s fintech affiliate Ant Financial – which provides online banking, fund management and other financial services – has been valued at more than US$70bn and controls more than half of China’s fast-growing US$5.5tn mobile payments market. Tencent’s investments, meanwhile, include online lenders, investment banks and payment systems.
What type of opportunities is fintech creating in China?
Fintech revenues – including insuretech premiums – in China are set to grow a whopping 39% year-on-year and hit US$75bn by 2019, according to estimates by Bernstein Research, which predicts soaring growth in online payment systems.
“Chinese consumers have few reservations about sharing personal information and are ready to embrace fintech offerings, creating opportunities for fintech firms and incumbents willing to take on digital transformation,” writes accountancy firm EY in The rise of fintech in China
– a report compiled with DBS Bank.
Technology platforms that can provide financial services are hot property in China and it is therefore not surprising that Chinese conglomerates such as Geely and Legend are snapping up fintech-supporting lenders like Saxo and BIL, which have a background in digital start-ups.
“Fintech is going to be huge in China and an important part of that will be the application of fintech in industry,” says Jue Wang, a China specialist at think tank Chatham House.
How does this work in tandem with the government?
The mechanics of the levers of power in China’s one-party system are not always transparent, but it is likely that Geely and Legend’s acquisitions have, to an extent, been influenced by the Chinese Government’s industrial strategy.
About 30% of Legend is owned by the Chinese Academy of Sciences, a state institution. The country’s economic rise has been built on low-end manufacturing, but as wages rise and competition from other Asian countries increases, the Beijing Government has set out a plan – Made in China 2025 – to reboot the economy towards innovative higher value, advanced manufacturing led by automation, robotics, big data and cloud computing.
In order to flourish in China, a company must stay on the right side of the government. “By buying overseas companies that directly support China’s attempts to become the world’s most innovative manufacturing country, they are effectively scoring brownie points with the Communist Party,” James says.
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