How FinTech will ride China investment demand

August 29, 2015 08:05
FinTech is posing a challenge to traditional banking models, but consumers are benefiting. Photo: HKEJ

Financial technology, or FinTech, is a line of business based on using software to provide financial services, financial information and various technical services across an entire ecosystem.

A sophisticated operating model has created diversified and multi-layered opportunities.

And people are increasingly relying on FinTech platforms to make investment decisions, enabling financial services to expand rapidly and break the monopoly held by deep-pocketed traditional banks, securities firms, insurance, trust, funds and futures companies that hold financial service licenses.

Amid this situation, "China investment" has emerged as a buzzword, helped by the whopping gains in equities in the mainland and Hong Kong prior to the recent selloff.

The Beijing-led Asia Infrastructure Investment Bank and "One Belt One Road" strategy, as well as the Shanghai-Hong Kong Stock Connect, all have strong flavor of China investment.

Mainland China capital has invested and driven up prices of various asset classes, and also made the investment targets more liquid. This has lured capital from other countries as well. China has shifted from a capital importer to a capital exporter.

FinTech targets entities such as asset managers, settlement payment systems, intermediary channels and other sectors including information and media. Upgrade of the links will forge a complete FinTech ecosystem.

FinTech offers a great diversity of investment opportunities and could render fast growth and attractive return in any fragmented sector.

Over the last few decades, we have all become familiar with the “Made in China” concept in view of the cost and other advantages for manufacturing operations in the country. But now it is the "China investment” theme that is gaining ground.

Capital re-allocation triggered by economic restructuring has just started, and cross-border capital flow from mainland is still in the early stage.

Renminbi convertibility and interest rate liberalization are the two key market themes. Traditional financial sector has some edge in currency exchange, but lacks flexibility in cross-border capital flow and interest rate market reform. That would offer enormous opportunity for FinTech start-ups.

Internet and mobile technology could offer ease and convenience in cross-border capital flow and high-efficiency in interest rate pricing.

The investment decision behind various opportunities is actually a re-matching between risk and return. The transparency of the internet plays a key role in that process. In the past, investment has been limited by the products designed by traditional financial institutions.

Many investors fail see through the underlying asset of various investment products due to emerging mezzanine finance and channel services. FinTech could remove these barriers and provide information on underlying assets for investors to help them in their decision-making.

Also, Big Data analysis offered by FinTech will provide a lot of help in investment.

In addition, FinTech has removed the entry barrier of financial license. For example, a local city commercial bank or micro loan company can only be allowed to operate in a certain city or region. But online peer-to-peer (P2P) lending platforms have broken the geographical restriction.

Attracting deposits has always been the most profitable business for traditional banks. But now online money market funds like Yu’ebao have become a source of disruptive competition to the established banks.

Meanwhile, credit rating, guarantee, quasi-credit card, asset securitization, capital pool businesses are all encountering a huge challenge from FinTech firms.

"China Investment" has mirrored the massive buying power of private sector, which values service pricing as well as asset allocation. The rapid growth of FinTech industry will beef up their pricing power. They can act quickly in response to market changes, which would lead to a virtuous cycle.

FinTech industry will enter a new chapter with the emerging "China Investment". The sector will focus on cross-border capital flow, re-match of risk and return, removal of traditional entry barriers and re-pricing of assets.

This article, published in the Hong Kong Economic Journal on Aug. 26, was contributed by Chen Daliang, senior manager of capital market division in Hong Kong at PwC.

Translation by Julie Zhu

[Chinese version中文版]

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