“Taobao”, a Chinese term which means finding treasure, is part of a bigger process which is discreetly transforming the payment system and money or credit creation in the country.
In the China Super League, Evergrande Taobao Football Club (“Evergrande Taobao”) has in recent years captured a lot of attention. In addition to football successes, the six-times champion has also attracted a lot of envy for non-football reasons such as its massive transfer budget for players and coaches. It also has been accused of fueling an investment bubble.
The club boasts two powerful players who are the architects of China’s two other economic bubbles. One is on the bubble of real estate; the other, however, is a credit bubble resulting from the elimination of coins and changes.
From finding treasure to paying for it
Evergrande’s involvement in the housing bubble is very well understood. It is the country’s leading property developer.
It has a market capitalization of close to US$30 billion, one of the biggest red-chip property developers listed in Hong Kong, and a net debt to equity ratio of 184 percent, a number forecast by JPMorgan in July 2017.
These are familiar stories to those who have seen the booms and busts of housing cycles. Many investors had shorted the shares based on these and other frighteningly high leverage ratios.
The scene in June this year had turned ugly (or pretty, depending on one’s perspective) when a dramatic buy-back program triggered breathtaking short-coverage and extreme volatility.
Sitting next to the builder is Taobao and its parent, an e-commerce colossal, whose role in China’s current state of the credit bubble is relatively less talked about. Taobao is to China what eBay is to the American consumers.
It is housed “inside” the family of Alibaba, a New York-listed group that is ranked as one of the world’s largest internet and technology companies by market capitalization. At US$360 billion as of June 2017, it is just behind Facebook, the US social network giant, but ahead of Tencent, a Chinese peer.
Closely associated with Taobao and Alibaba is Ant Financial, a fintech group, which now sits “outside” of the listed company and holds the key to China’s new form of credit creation. Ant Financial, incorporated in 2014, traces its origin to Alipay, whose formation in 2004 was arguably a stroke of genius by Jack Ma, Alibaba’s chairman, and his team.
Back then, they were scratching their heads trying to solve the problem of online payments between and among merchants and consumers, who were collectively plagued by the lack of trust and credibility in the system.
Perhaps inspired by American Paypal, Alibaba developed the Chinese version of online payment with similar escrow features, initially with minor twists and localizations. The runaway success of this model has naturally attracted criticism (then and now) that it was (is) little more than a copycat of its American cousin.
Alipay’s market entry has been nothing but phenomenal. Much of it has to do with its pole position in the “eco-system approach” championed by the Alibaba group. From initially being the payment solution for Alibaba’s e-commerce (B2B), Taobao (C2C) to Tmall (B2C), Alipay has rapidly outgrown these transactional-based “scenarios” (i.e., moments to pay) to place itself right at the center of the smartphone-loving-consumers and their everyday lives.
Its high volume and tenacity come from the fact that people use it to carry out almost all cash transactions from splitting the bill among friends on a meal, paying utilities, booking a taxi, buying movie tickets, etc.
An ecosystem approach that captures every purchase scenario
Alipay is now part of a family of apps and services at Ant Financial. These include a money market fund (Yu’e bao), online bank (Mybank), a social credit scoring system (Zhima Credit), a wealth management platform (Ant Fortune), and an online consumer credit portal (Ant Credit Pay), among others.
Of these, perhaps the launching of Yu’e bao (literally, “residual money”) was particularly eye-opening. It highlights that with the ease of technology, smart engineering and the lure of higher return (4 to 5 percent over regulated rate at any time), mountains of coins, small notes, idle money initially scattered in the hands of urban consumers or small business owners can now be consolidated and channeled into the deposit system of the modern, digital banking world.
It is said that within 12 months after it was launched in May 2014, Yu’e bao became the “fastest-growing mutual fund of all time” (quoted in a Harvard Business School study), raising US$108 billion. As these breakneck growths stemmed not just from what were originally coins and petty cash, but also from deposits of other banks, competitors with entrenched interests and regulators became alerted. Since then, the group has been rather coy about the amount managed by the fund. Despite this, it still counted in early 2017 over 300 million users who parked their “residual money” in the fund.
Ant Financial doesn’t stop at being a solution for urban dwellers. In fact, it takes pride of its growing capability to serve hundreds of millions of people residing in rural China. Many of these people have not been considered “customers” by traditional retail banks. Armed with the mobile app, and free riding the billions of investments in base stations and telecom infrastructure by the telecom giants, it has developed a virtual network of a “non-bank” bank. These investments are huge by most standards, but it is much cheaper than if anyone was to build a brick-and-mortar banking network covering the vast farmland and if the branches were to be staffed by wage-hungry bankers.
Cashless society and money expansion: a paradoxical co-existence
Now, a fuller picture of how Alipay and Ant Financial (perhaps in a similar fashion, WeChat pay and WeBank of Tencent) create new credit has started to emerge.
First, in cities, coins and petty cash are replaced by mobile apps and ecosystems. The cashless phenomenon is not much unlike Hong Kong’s Octopus scenario – except perhaps that the mainland version is more omnipresent and is smartphone-based.
Second, the previously unreachable and unaccountable cash businesses in rural areas (consider the vastly untaxed shadow economy) are beginning to be co-opted into the “banking” system by these non-bank networks.
The specific impacts of these twin developments of new credit formation on China’s already heightened credit bubble can only be delineated with more available data and empirical studies. Here are, on a very general level, several speculations:
First, when the currency in circulation is deposited in a bank, it kick-starts a process called (in the words of Frederic Mishkin, an ex-Federal Reserve governor and a financial economist) deposit multiplier effect, which means when this money is in the bank, it allows multiple credit creation. Once this money leaves the banks and is held in the hands of the public, the effect naturally stops.
The second likely impact is that it expands the coverage of “bank” or “credit” to hitherto the “non-bankable”. An army of rural, under-covered, lower-income peasantry and small business owners is now suddenly “credit-worthy” in an ecosystem which sees Zhima Credit providing big-data-based credit profiling for the digital bank and the trading partners, Mybank offering on average 17,000 yuan (US$2,516) per loan (its outstanding loan balance reached 800 billion yuan at January 2017) and “Rural Taobao” granting supply chain finance.
In a most dramatic day, the Single Day Festival in November 2016, Mybank claimed to have provided 1.3 million merchants with loans amounting to almost 50 billion yuan.
How big can deposit (credit) go?
Coins, notes and currency in circulation are conventionally included in M1, of course. It is, however, the multiplier, or credit expansion, effect that they do not have when they are not in the form of bank deposits. (Some may cite lending to be the main driver of credit creation today, not deposits, but that may apply to a more mature economy rather than in China.)
How important is “deposit” in the process of credit or money creation? We need to read no further than what Ben Bernanke, the man who oversaw one of the biggest credit creations in the history of humanity, had preached. In explaining how in 2008-09, the Fed created money (US$3.2 trillion to be exact), Bernanke described that it was by a stroke on the keyboard in the entry of deposit account of the banks.
“[H]ow did we pay…? … [T]he answer is that we paid for those securities by crediting the bank accounts of the people who sold them to us… So the Fed is a bank for the banks… the way we paid…was basically by increasing the amount of reserves (the deposit accounts) that banks had in their accounts with the Fed,” said Bernanke in 2012.
In layman terms, the trick is that, starting with the deposits of banks, central banks can pay by creating credit. It is not very hard, isn’t it?
Good bubble and bad credit?
On a final note, it may be worth taking a pause while blaming the 4 trillion yuan package unleashed in 2008 for the credit bubble and indebtedness today. Few have perhaps noticed that beyond the headline SOE-banks-driven credit bubble blown up by state capitalism, there is a small, dynamic, private, healthier side of a force at work, too. While the SOE banks are locked into the dead pool of zombie lending, or have to settle for the meager return on infrastructure projects across the wild west (does “One Road One Belt” come to mind?), another type of credit, currently accounting for just few percentage points of total banking assets, will grow and center on the vibrant, hungry and often unruly parts of the economy.
Back to the stadium and zooming in on the star players on the pitch, in the not-so-distant future, we might be able to see Chinese football clubs paying for world-class footballers (Neymar maybe?) with the stroke of a finger on a mobile phone. No mortgage is needed.
That’s “money at your fingertips” in every sense of those words.
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