This flowering of mobile internet technology is making China an excellent example of “leapfrogging,” a common theme throughout the developing world. Leapfrogging occurs when an emerging-market economy skips technological steps that the developed world had to work through, says Monty Guild, money manager and editor of Guild Investment Management.
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The classic case is in telecommunication. Rather than go through the lengthy and laborious and capital-intensive stage of building wires, developing countries in Africa and Asia skipped landlines and went direct to wireless.
China’s development as a capitalist economy, and particularly the growth of Chinese retail, essentially leapfrogged the century-long development of brick-and-mortar retail in the developed world.
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China’s e-commerce leapfrog has created some of the world’s most innovative e-commerce firms -- companies such as Alibaba (BABA), JD.com (JD), Baidu (BIDU), Tencent (Hong Kong: 700), YY.com (YY), and others.
What these firms have in common is their fierce ambition to build holistic experiential ecosystems in which their users can meet all their economic, commercial, and social needs. They blend e-commerce, social media, and entertainment, including videogames and livestreaming.
Increasingly, they are adding financial services to this mix -- and these may prove to be the most disruptive and lucrative elements of their strategy.
“Fintech” refers to the intersection of technology and finance. One of the most remarkable manifestations of the fintech boom is the rapidity with which mobile payments have become ubiquitous in urban China.
In China’s first-tier cities, almost everyone pays for almost everything using a smartphone -- not using cash or a credit card.
What Apple Pay, Android Pay, and other mobile wallet applications have been struggling and failing to achieve in almost all of the developed world, Chinese firms have achieved in the space of three years -- largely because they were meeting the unmet needs of unbanked, or underbanked, consumers and businesses.
With mobile payments relying on scans of QR codes, even a card reader is unnecessary. And with balances residing within the payment system, transaction costs can be driven down relentlessly.
BABA recently debuted facial recognition technology at KFC stores in China -- where users can “smile to pay,” have the system recognize their face and debit their Alipay account without even a smartphone being necessary.
The dominant leader in mobile payments is BABA, with Tencent coming in second. BABA’s Alipay was a natural development of its online marketplaces, and Tencent developed WeChat Pay as an extension of its mobile communication platform.
Alipay gained traction because it functioned as an escrow service for online payments when consumer trust was low -- a purchaser would only be debited for goods after indicating that they were acceptable.
Taken together, Ant Financial (BABA’s financial affiliate) and Tencent are set to surpass Visa (V) and Mastercard (MA) in total daily global transactions in the coming year.
Of course, these developments must be seen within the ambition of BABA and Tencent — and BIDU, who is partnering with Paypal (PYPL) -- to build comprehensive ecosystems in which consumers and businesses will spend more and more of their time.
With $170 billion in assets under management in the first quarter of 2017, and 300 million users, BABA’s money-market fund, Yuebao, is the largest in the world. It offers users security, liquidity, and better returns than they can get from a bank.
BABA can triangulate data from consumers across its entire sprawling platform, with unprecedented insight into spending and saving habits, creditworthiness, social habits, and so on -- giving them tremendous leverage in developing and selling and delivering new services for consumers and businesses.
This also explains why Chinese firms are spending big to position themselves as global leaders in artificial intelligence.
For now, also, although the first clouds of negative consumer and antitrust sentiment are gathering on the horizon for the U.S. tech giants, the Chinese government is highly favorable to Chinese tech.
What are the investment implications? You would have to roll together Amazon (AMZN), Facebook (FB), Paypal, and a few other U.S. firms in order to arrive at the total commercial presence that Alibaba and its competitors are creating in China, and to us, the theme of these burgeoning internet conglomerates looks likely to endure for years to come.
We continue to like big-cap U.S. technology firms, but we think that many Chinese firms are positioned with extremely powerful social, economic, and technological tailwinds behind them, and may be poised for a year or two of significant outperformance.
Investors may consider all of the companies mentioned above, although Alibaba and Tencent are our favorites. Investors may also approach the theme through an ETF; one option is the KraneShares CSI China Internet ETF (KWEB).
