According to statistics released in early 2020 by the People’s Bank of China (PBOC) the number of electronic payments processed by country’s banks increased by 6.3% compared to the same period in 2018. 62.1 billion electronic payments have been registered, including 30.7 billion of mobile transactions, representing a year-on-year increase of 73.6%. In March 2020, 776.08 million persons were using mobile payment in China.

COVID-19 boosted online and mobile payments in China

After the COVID-19 epidemic in China, the Payment & Clearing Association of China (PCAC) launched an action on February 28, 2020 to encourage people to use mobile payment, online payment and QR payment to avoid the risk of infection.

Just after the Labor Day holiday in May, payment giants released their payment data. According to Zhuanlan, compared with Qingming Festival in April, the average daily transaction amount of UnionPay increased by 7.7%. Perhaps COVID-19 is the driving force on online transactions in China. The online platform handles 1.354 billion capital online payment businesses on a daily basis, an increase of 54.59% year-on-year. At the same time, the number of offline barcode payment (mobile payment) transactions on a daily basis increased by 48.5% year-on-year. In terms of Alipay, the payment frequency of sightseeing spots has increased by 120%; the amount of payment Wechat paid for restaurants under the line has increased by 447% compared with that in March.

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In 2018, around 83% of all payments were made via mobile payment modes

China has developed differently in terms of payment methods: while all countries have switched from cash to credit cards and are now switching to mobile phones, China has skipped a step. The use of the credit card in China is sporadic, if not non-existent.

And even though mobile payment is overgrowing across the continent, Chinese people are using phone payments more often than their neighbors in Asia.

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Why and how do mobile payments in China work?

This increase in the use of smartphone payments in China is linked to the growth of e-commerce and m-commerce. Indeed, if the share of online sales may still seem relatively low, it is increasing very quickly.

Experts even estimate that mobile commerce in China will reach about $1.5 trillion in sales in 2019, representing a quarter of the country’s overall retail market.

Also, mobile payments have been so successful in China because they are fast and straightforward. And this speed is possible thanks to the QR codes. In China QR Codes are everywhere; even street musicians have a QR Code to collect money.

• There are two ways to pay via QR Codes in China: The customer scans the seller’s QR code, which is very often printed and visible at the checkout, on restaurant tables and even on products in some stores. The customer then chooses the amount and can send the money directly to the seller.
• The customer shows the QR code displayed on his smartphone, and the seller scans it. This method is even simpler and faster because the customer has nothing to do; it is up to the seller to select the amount that will then be deducted from his mobile wallet.

China has therefore quickly adopted mobile payment, and this is mainly because it is very easy for sellers. Unlike Apple Pay, where sellers have to buy technology to receive a payment, in China, a simple piece of paper printed with the QR code is enough.

Mobile payment methods in China in 2019

Tenpay (including WeChat Pay and QQ Wallet)

Tenpay has the biggest market share by penetration rate in China, with 84,3% in 2018. Enveloped by Tencent Company, which owns the most popular social media in China, Wechat (Weixin), Tenpay has developed the most used mobile payment solution in China: WeChat Pay.

WeChat, the Chinese giant, sees 1.08 billion monthly active users in 2018 and more than 900 million users on a monthly basis. We could barely compare this to Apple Pay which has only reached 127 million monthly active users in the world.

Today Wechat pay strategy in China is to extend its services to various financial products – from investment funds to insurance, allowing users to pay for it directly within the app.

Wechat pay transaction fees of 0.1% start at withdrawals over 10,000 RMB as well as overseas transactions such as in case of cross border commerce. The app currently supports 9 currencies, against 18 for AliPay. Cross-border transactions can still be complicated, but WeChat has recently partnered with Adyen, an international payment technology company to facilitate access to China for foreign companies.

Alipay

Alipay is the only online payment system used on Taobao, which is the leading shopping website in China, owned by Alibaba.

Alipay has the second biggest market share in China with over 900 million users worldwide at the end of 2018 and 700 million active users. Many major websites use Alipay as an e-commerce payment method, such as Taobao, Amazon, JD.com and AirAsia, and other 40 million small shops and sellers in China.

Considering low trust in China’s online payment system, they introduced escrow (the payment is made by the buyer before the product is shipped and the payment is released when the product is received) and immediate payment (used to pay for hotel room bookings, flight bookings or other items that do not need to be shipped) to solve the trust issue and to expand the market.

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As a foreign company to set up on this platform, you need to pay USD 1,000. Transaction fees are 2.5 – 3.0% depending on your annual transaction volume.

For Chinese companies there is no setup fee, they need only pay 0.7-1.2% as transaction fees. You can communicate with Nanjing Marketing Group for the information on setting up your account. Alipay has arrangements with over 60 Chinese banks, Visa and Mastercard.

China Union Pay

Union Pay is the world’s largest payment card issuer with approximately 30% of cards worldwide being a China UnionPay card (CUP). China Union Pay is the only domestic bank card organization in China, linking the ATMs of 14 major banks and many smaller banks throughout mainland China. It is also an Electronic Funds Transfer at Point of Sale (EFTPOS).

With China Payment Services, international merchants do not need a physical presence in China, nor do they need a Chinese bank account.

The “push payment” principle is a different process that Westerners may not be accustomed to, whereby users are directed to their personal bank account to authorize the payment.

Many sizeable international eCommerce merchants in China are choosing to offer liberal return policies for card payments, rather than provide a Cash on Delivery option, making UnionPay card payments an excellent China online payment method for any international merchant. In 2019, Union Pay is planning to enter the European market in a move that could cause serious competition for Visa and Mastercard.

Paypal

Paypal entered into China in 2005 with services specifically designed for the Chinese population, including Chinese entrepreneurs.

But the Chinese market of mobile payment methods is very difficult to conquer for Paypal, especially against the competition.  In 2017, an agreement was reached with Baidu Wallet that allows Chinese companies to have better access to the international market and vice versa. PayPal and China UnionPay have also agreed to work together.

How do consumers pay in China?

Cash on Delivery (COD)

Cash on delivery makes up the largest percentage of online payment methods in China. Famous websites such as Dangdang, Amazon, JD.com are conducting methods like this as one option. COD is a payment method in which it is the carrier who ensures the collection of the payment in return for part of the goods and who takes care of the return of the amount to the seller.

There are many reasons for the preference for this payment method in China. Firstly, goods can be quality assured by the receiver before payment. Secondly, if people don’t have an account for online payment (for example a senior or someone from a rural area who is not good at using a computer), they tend to choose this method. COD payment can be made by cash (uncommon) certified check or money order.

Credit Cards in China (China UnionPay cards)

Online credit card usage in China is less than 5%, not as popular as in Western countries. International cards such as Visa and MasterCard are not common online payment methods due to the low-trust associated with them in China.

Debit Cards (China UnionPay cards)

Debit cards are widely used by Chinese consumers for Internet purchases. The funds paid using a debit card are transferred immediately from the bearer’s account through use of a “push payment“ principle. During the online payment process, users are directed to their personal bank account where they physically log in and authorize the transaction.

Although COD makes up the most significant percentage of China online payment methods, the trend towards using debit/credit cards (China UnionPay cards) is continually increasing as more domestic and international online merchants integrate the option of online card payments on their website.

Shipping methods in China

Major shipping companies in China

1. SF Express (Shunfeng Express) 深圳顺丰速运

It has built an extensive business unit covering research and development, logistics, pickup & delivery network, etc. which spans the nation (including Hong Kong, Macau, and Taiwan). At the same time, its international network has been actively expanding to South Korea, Singapore, Malaysia, Japan, the United States, and Europe.

2. STO Express 上海申通快递

Covering Mainland China and Hong Kong, Macau and Taiwan,  this shipping company is in service 365 days all year round.

3. Shanghai YTO Express 上海圆通速递

Yto express is a large famous private shipping company in China. They have set up 4800 branches and have covered more than 1380 cities and 76 airports all over China.

4. TTK Express 上海天天快递

They have weixin service as a method to track the package. Their business is mainly in Mainland China and Taiwan.

5. Yundaex 上海韵达快运

Their business is mainly in Mainland China and Taiwan. For international packages, they work with DHL, UPS, TNT, EMS.

6. EMS (Worldwide express mail service) 邮政特快

EMS is one of the major shipping companies in China which owns China Postal Airlines and China Post Logistics. The company has nearly 100,000 employees and 45,000 sales outlets in more than 200 countries and regions. The company possesses the world-acclaimed brand “EMS” and the leading domestic logistics brand “CNPL.”

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How can foreign businesses use new mobile payment methods to boost their business in China?

Create official accounts to provide special offers

The Alipay and WeChat Pay mobile payment methods offer the possibility to set up individual marketing campaigns. They are not only payment tools, it goes further. For example, you can attract your customers’ attention by directly offering coupons and promotions that can be used via Wechat Pay or Alipay. These coupons can be placed in applications during critical events such as the Golden Week, Singles Day, the Chinese New Year, etc.  For Wechat, it is called the WeChat Voucher solution.

You can also offer your customers a Wechat membership card which is a virtual discount card with the cumulative discount at several levels. Then, you will need to measure these actions, the ROI, to determine the impact on your business but it can attract new consumers and simplify your customer journey.

Allow mobile payments for your Chinese clients, out of China

According to a 2018 survey by Nielsen and Alipay, 91% of Chinese tourists would shop more if overseas merchants had mobile payment options. So if you want to increase your customer base of Chinese tourists, you can develop your payment options.

Allowing mobile payments for Chinese customers is what many countries are doing. According to Alipay’s statistics, in 2018, the number of mobile payment transactions has increased 75 times in Russia, 12 times in Canada and eight times in Malaysia. The same phenomenon has been observed in New Zealand, Australia, and Finland.

Recently, the Galeries Lafayette group in France, whose Chinese customers represent approximately 25% of its €2 billion turnovers, also chose to that implement this strategy.

After opening a store dedicated to Asian customers, the Galeries Lafayette group now accepts payments with Wechat. For the company, this is a logical step in its strategy to conquer the Chinese tourism market.

Want to know more about how you could leverage online payment platforms in China? Daxue Consulting’s Online market research service provides you with in-house service for every step of your research project and can help you to draw a comprehensive digital mapping of your sales funnels in China.

Do not hesitate to reach out our project managers at dx@daxue-consulting.com to get all answers to your questions.

This article Payment methods in China: How China became a mobile-first nation | Daxue Consulting is the first one to appear on Daxue Consulting - Market Research China.

With its emergence as a strong global economy, opportunities for mergers and acquisitions in China have increased in number and scale. However, financial, regulatory and cultural complexities surrounding Chinese transactions present unique challenges. Despite the overall global economic decline, M&A in certain sectors such as TMT and industrials remained active in 2019. The global factors impacting the future of the China’s M&A market are segmented into three scenarios.

These three scenarios include: The U.S. China trade tensions stabilizing through phased agreements. Second, China’s new foreign investment law and policy coming into play. Third, China’s planned new rules to open up certain heavily regulated industries such as automobiles and financial services. Therefore, the 2020 and 2021 the outlook for China’s M&A market be more active than in 2019, especially in those industries and particularly through inbound deals.

Looking deeper into 2020 and beyond, Chinese outbound transactions focused on strategic areas will continue to be a main driver for Chinese outbound M&A activity in the region. However, continued tensions between the U.S. and China in combination with the hurdles presented by national security reviews may dampen China’s interests in outbound activities to the U.S. and Europe. On the other hand, multinational companies in China will continue to review their domestic China market strategy and reevaluate their interests in forming partnerships with Chinese firms. As a result, this will drive support for steady deal activity. Furthermore, sponsors will remain active in Greater China with additional capital to deploy attractive valuations.

Legislation and Policy Changes in China’s M&A market

There is no single law or regulation specifically regulating M&A in China. An M&A deal may involve many laws and regulations. For example, PRC Company Law may be relevant when designing the corporate structure of the target company. PRC Securities Law and its supporting regulations may come into play in a public M&A transaction. Contract Law may govern when an asset purchase is part of the deal. Employment Law and Employment Contract Law may come into play when employees need to be transferred in the transaction. In addition, tax law is always relevant, and foreign exchange policy and regulation is important when payment of the deal needs to be made cross-border. Antitrust Law may be relevant if a deal meets a certain threshold triggering a regulatory requirement to make a filing.

The Foreign Investment Law, which took effect on January 1 2020, will replace a collection of decades old laws with a single, unified and streamlined legal and regulatory framework for foreign investment that is applicable nationwide. The Chinese national legislature passed the Foreign Investment Law with the aim of creating a better business environment for overseas investors. Inbound investment via M&A in China is expected to reach $1.5 trillion dollars over the next 10 years according to a report from Xinhua News.

The Foreign Investment Law seeks to protect the rights of foreign investors and their intellectual property, and clearly incentivizes them to invest in China. It also helps Chinese companies move up the value chain. The evolving nature of China’s consumer economy and the desire for Chinese industry to continue to move up the value chain are two particularly important drivers of economic opportunity. These factors are expected to boost inbound M&A transactions in the future.

Defining M&A: Types of Mergers and Deal Players

A merger is the process by which two or more companies merge together as one new company. Acquisition often refers to the process when a financially stronger company acquires over 50% of shares of another company and brings it into its own operation. Companies can also engage in a minority share, majority share, equal share and buyout scenario acquisition. The decision of which option to take is tied into a corporate’s strategy and growth plans. Additionally, it is important to consider acquisition structure, as each option offers varying degrees of control and various other trade offs. There are five types of mergers: horizontal, vertical, market-extension, product-extension, and conglomerate mergers.

Moreover, M&A acquirers fall under two broad categories. First are strategic investors, which are operating companies looking to buy other businesses in order to expand or defend market share and enhance profitability. The second are private equity investors (or financial buyers). Financial buyers are buyers that purchase minority stakes in start-ups, mid-growth enterprises and mature businesses using funds pooled from individual investors. Financial buyers typically aim to eventually sell out at a profit through exits such as initial public offerings (IPOs) or a sale to strategic investors.

Global M&A Market

Global M&A made a strong showing in 2019. This came as stock markets reached all-time highs, private equity firms raised record funds, and companies searched for growth and other ways to address technological and economic disruptions. This was impressive given the fears of a potential recession, stock pull-backs in certain markets, increasing trade disputes, as well as heightened national security and competition concerns.

However, global M&A value in 2019 lagged behind 2018 numbers for much of the year. But, a surge of deals in Q4 2019 drove total M&A value to $3.9 trillion dollars, just 3% lower than 2018. This made 2019 the fourth biggest year for M&A since 1980. In particular, M&A value rose for deals in the United States and Japan, but fell for deals in Europe and the rest of Asia. Healthcare, technology, and energy were the most active sectors, accounting for about half the overall volume.

[Source: IMAA analysis, Worldwide M&A and Chinese M&A statistics]

In 2019, M&A involving Chinese targets totaled roughly $170 billion dollars, but represented only 5% of all global M&A volume. This is a small share compared to M&A involving U.S. targets, which made up more than half of global M&A volume in 2019. This makes China vastly underrepresented in the global M&A market in consideration of and relation to the sheer size of the Chinese economy. GDP in China was $15 trillion in 2019 compared to $22 trillion in the U.S. Also, 2019’s volume for deals involving Chinese targets was the lowest since 2014, which has been part of a downward trend over recent years following a peak in 2015.

China’s M&A Market: Top Industries 2000-2016

From 2000-2016, China’s industry with the largest M&A activity in terms of transaction value has been the financial sector. Which has represented 16.8% of all deals with a total value of $753 billion dollars. The second most important industry by value is the materials sector with $558 billion dollars worth of transactions. The industrial industry reached the third rank with $527 billion of deals.

The industry with the largest number of transactions has been Industrials, which has represented 14.2% with a total number of over 9,737 transactions. The second most active acquirers are companies from Materials with more than 9,516 deals accounting for 13.8% of transactions. Lastly, Financials companies are the third most frequent industry in terms of consolidation with 13.8% of all deals.

[Source: IMAA analysis, Announced M&A in China and Hong Kong by Industries (2000-2016)]

At the micro level, in 2018, 2,584 takeovers with Chinese participation took place. The leading five sectors of company takeovers with Chinese involvement based on the total M&A transaction values were real estate, financial telecommunications with value-added services, energy, mineral deposits, and chemical processing. The M&A transaction value amounted to around 113 billion yuan in the real estate sector. In terms of volume, the sectors with the largest amount of M&A company takeover transactions in China were the IT, biotechnology/pharmaceuticals, mechanical engineering, finance, and electronics sectors.

[Source: Statista, PEdaily.cn, Value and number of M&A transactions with Chinese involvement by sector]

Assessing China’s M&A Market

To measure China’s M&A market in its entirety, any assessment must include the added values of 1) domestic strategic buyers, 2) foreign strategic buyers, 3) private equity deals, 4) Hong Kong outbound, and 5) China mainland outbound.

In recent years, the landscape of China’s M&A market has changed fundamentally. While the growth of inbound, outbound, and domestic M&A has been affected by global economic downswings and fluctuating Chinese growth, more and more Chinese companies will continue to seek opportunities through oversea Belt and Road M&A and domestic consolidation.  China’s leading sectors for M&A in Belt and Road countries are oil and gas, diversified industrial products, financial services, TMT, power and utilities, consumer products, mining and metals.

China’s M&A market experienced a slow start in the first half of 2019 but picked up considerably after June. Nonetheless, the market has slowed indefinitely. In particular, the principal drivers of the 14% decline in China’s M&A deal values were the domestic and outbound sectors. The drop in outbound M&A and private equity (PE) resulted in the lowest year for deal values since 2013. According to Dealogic, announced M&A deals in China amounted to $486 billion, as compared to $562 billion in 2018 and $661 billion in 2017. While inbound M&A remains stable ($30 billion in 2019, a slight decrease from $33 billion in 2018), both outbound deals ($53 billion in 2019 compared to $72 billion in 2018) and domestic deals ($368 billion in 2019 compared to $440 billion in 2018) saw a notable downturn.

[Source: JPMorgan, Dealogic, China M&A announced $ volume ($billion)]

Most M&A transactions of Chinese companies still take place in the domestic market. Roughly 80% of all Chinese M&A activity is domestic, involving both Chinese acquirers and Chinese targets. The expectation is that the bulk of M&A volume going forward will be accounted for by foreigners investing in, or acquiring, domestic companies. Also, by domestic companies merging with and acquiring each other. The key drivers here include rising purchasing power and private consumption, the government’s desire for foreign funds and expertise for SOEs as it fully opens sectors of the economy to foreign competition, and a more relaxed regulatory regime that, for example, has expanded the scope and geographical reach of wholly owned foreign enterprises (WOFEs).

The economically better developed regions such as China’s largest cities Beijing and Shanghai still lead the market. In 2018, 299 M&A transactions were completed in Beijing with a transaction value of around 207 billion yuan. In line with China’s economic reforms, foreign buyers will increase their activity in China’s M&A market in those sectors and areas favorable to making deals.

In China, especially those MNCs in consumer/retail and enterprise service sectors continued to explore strategic reviews and partnered with local players. Some of which were structured as a divestiture of a controlling stake. High-profile transactions in this category include Metro China’s partnership with Wumart, Carrefour’s partnership with Suning, and DHL’s sale of its supply chain business to SF Express. This is a continuation of a theme that has gained strong momentum since 2017, as companies such as McDonald’s, Yum! China, Heineken, and Salesforce partner with Chinese companies to strengthen their competitiveness in a fast-changing local market.

Outbound and Inbound M&A

[Source: IMAA analysis, Dealogic, Announced M&A from China to abroad (outbound) and M&A by foreign acquirers into China (inbound)]

China was not a major player in global investment until the mid 2000s. Driven by policy loosening by Beijing and favorable global conditions, its outbound FDI (OFDI) grew from next to nothing to an average of almost $50 billion per year in the late 2000s. Easy money and loosening of Chinese policy in 2014 boosted flows to more than $200 billion in 2016, eliciting both enthusiasm about fresh capital and anxiety about economic and security risks.

Since 2016 China’s outbound investment has been on a downward trajectory. Outflows dropped precipitously in 2017 and 2018 after Beijing restricted “irrational” outflows. In addition to domestic regulators, Chinese investors also were confronted with greater regulatory and political scrutiny abroad, as economies tightened investment screening regimes due to concerns about China’s compatibility with their democratic market economies.

Global outbound direct investment dropped

In 2019 this downward trajectory continued with China’s global outbound foreign direct investment dropping back to 2014 levels. Official Chinese statistics show a modest decline in outbound FDI for the year: MOFCOM reports outbound FDI at $117 billion for January-December 2019, a decrease of 9.8% from the same period in 2018 in dollar terms. The global M&A component shows a deep drop, with newly announced 2019 deals at $50 billion, versus $80 billion in 2018, amounting to the lowest level in eight years.

Thus, China’s efforts to cut debt levels combined with the negative effects from the trade war have cut into outbound deal activity by Chinese firms. China’s outbound M&A fell back relatively to 2015 levels in value terms, with various factors combining to severely curtail large sized cross border transactions. However, there is still a good amount of smaller sized outbound transactions taking place with overall deal volumes holding up.

Chinese outbound M&A players are segmented by three categories: state owned enterprises (SOEs) , privately owned enterprises (POEs), and financial buyers.

POEs remained the most active overseas buyers in terms of volume although the overall value of those deals fell with considerably fewer mega deals. Mirroring the domestic scene, outbound deal values were strongest in the industrial and consumer sectors, but larger-sized high-tech deals took a significant hit due to the various sensitivities in this vertical. Furthermore, outbound M&A in the energy and power sectors, materials, and healthcare saw relative downturns in deal value.

Smaller outbound transactions less affected

However, in terms of deal volumes, outbound activity continues to be reasonably robust with smaller transactions being less affected. China’s strategy to acquire technology know how, IP, and brand strength to put to use in the Chinese market is continuing despite the headline declines in larger deals. Therefore, Chinese outbound M&A in the high technology, industrials, consumer, healthcare, financial, and materials sectors all carried out a high number of deal volumes.

Outbound M&A with Europe

In terms of geographies, the squeeze in outbound deal values is now evident in Europe with significant declines in the bigger markets of Germany ($6.5 billion in 2019 from $11 billion in 2018) and UK ($1.4 billion in 2019 from $4.5 billion in 2018). Chinese FDI in the European Union declined for a third straight year in 2019. The combined value of completed Chinese FDI transactions in the EU fell to EUR 11.7 billion, down 33% from 2018 levels (EUR 17.4 billion). This represents the lowest investment level since 2013 and a drop of 69% from the peak of EUR 37.3 billion in 2016.

But, this drop was not specific to the EU. Chinese global FDI fell in 2019 due largely to domestic variables which made it more difficult for Chinese firms to raise funding and get approval for overseas investments. The global decline also reflected a growing political and regulatory backlash against Chinese acquisitions, particularly in the U.S., but also in Europe.

Belt and Road countries and Latin America

Outbound activity to Belt and Road countries held up reasonably well in the context of the otherwise significant declines in deal values seen elsewhere. Furthermore, despite China’s outbound volume being down y-o-y, outbound activities remained active for investments into the Asia Pacific (outside China), Latin America, and EMEA. Consistent with China’s strategic needs, outbound investments in power and utilities, technology, and industrial sectors experienced strong momentum in 2019, with notable transactions including Three Gorges’ $3.6 billion cash acquisition of an 84% stake in Peruvian electric company Luz del Sur, Beijing Auto’s acquisition of a 5% stake in German automaker Daimler, and Jiangsu Shagang Steel Group’s $2.2 billion acquisition of London-based Global Switch Holdings.

In sum, the trade war between the U.S. and China along with a tightened CFIUS approval processes made Chinese buyers increasingly cautious when considering targets with significant business presence in the U.S. The expanded CFIUS jurisdiction that is expected to be implemented in 2020 will likely generate further headwinds for Chinese investment in the U.S., particularly for targets involved with advanced technologies, critical infrastructure, or sensitive personal data.

Added to the mix were national security reviews in Europe, which further drove the decline in outbound M&A from China. Thus, the uncertainty in M&A deals increasingly came from antitrust regulators across the globe. This trend makes early planning and engagement with the regulatory bodies in the cross-border deal making process a priority.

Concerning Chinese inbound M&A, while overall deal values and volumes posted marginal annual declines of 1% each, the M&A market avoided much deeper downtrends amid trade tensions with the U.S. and economic growth uncertainties domestically. Real estate, financial services and telecoms remain the sectors where M&A transactions with the largest deal values took place.

Dealmakers in the Chinese M&A market can expect to find opportunities in industries such as AI, advanced manufacturing, Fintech and healthcare. Particularly, the industrials and technology areas amongst other sectors are showing signs of robust growth. Moreover, on the regulatory front, China has begun a campaign to ease restrictions on foreign investment as it continues to open up the market. This could result in further inbound M&A, particularly from the U.S. should there be a thaw in trade negotiations currently taking place.

Important Considerations for Navigating China’s M&A Market

1. Magnitude of investment
2. How it varies across industries and locations
3. How it compares to levels of greenfield FDI over time
4. Horizontal (market access) versus vertical (integrating supply chains) transactions
5. Mode of financing
6. Diversifying transactions versus those in the same industry
7. Patterns of control acquisition
8. Strategic versus financially motivated transactions

Takeaway: What CEOs are saying?

According to the 2019 KPMP China CEO outlook survey results, 48% of CEOs in China believe that the most important strategy for achieving their growth objectives in the next three years are forming strategic alliances with third parties and conducting M&A transactions. In that same survey 56% of CEOs are reported to having a moderate M&A appetite, with 29% having a strong M&A appetite, and 15% having a low M&A appetite. Thus, in spite of the current global economic and investment climate, CEOs are still focusing on the opportunities in the Chinese M&A market.

The primary drivers for M&A among China’s CEOs ranked (in order) are: to reduce costs through synergies/economies of scale, to diversify the business, to transform the business model faster than organic growth, to increase market share, to on-board new digital technology/innovation, to take advantage of favorable valuations, to eliminate direct competitors, and to utilize cheap financing before interest rates rise.

Thus, in M&A consideration, it is important to assess the market value and proposition for each party in the deal, specifically what benefit a foreign stakeholder may bring to a Chinese enterprise. Concerning the benefits of M&A dealmaking with foreign MNCs, Chinese participant enterprises stated that expanding brand awareness, increasing market share, improving technology and productivity, increasing margins, and reducing costs were some of the benefits of engaging with oversea businesses in M&A deals. In addition, M&A benefits include: extending their upstream and downstream industrial chains, industrial transformation and upgrading, and cross-industry diversified operations. Thus, leading overseas businesses can reference these contributions from foreign MNCs to Chinese enterprises following the M&A deal to craft their own proposition.

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This article China’s Mergers and Acquisitions (M&A) Market is the first one to appear on Daxue Consulting - Market Research China.

Come 2020, the Coronavirus crisis acted as a game-changer for the entire industry. Nurturing disruptive innovation, and highlighting the most promising startups, could this virus eventually stretch back fundraising activities in China?

A brief History of startup investments in China

The history of Venture Capital in China begins long before one could imagine for a state with communist underpinnings. Yet, the late 1980s already saw private investment take off, thanks to reforms and new programs launched together to stimulate the Chinese economy.

The ‘Torch Program’ has been the launchpad for China’s high-tech revolution

In 1988, the Ministry of Science and Technology (MOST) launched the ‘Torch Program’, aimed at developing high technology and achieving industrialization. The program established high-tech industrial development zones across the country, gathering scientific and technological resources, as well as talents and money. These high-tech zones include three major parts:

• Science and Technology Industrial Parks (STIPs) to develop the commercialization of emerging technologies and research. China set up 54 STIPs, which accounted for close to 50 percent of all of China’s R&D spending.
• Productivity Promotion Centers (PPCs), incubators designed at providing consulting and product testing services.
• Technology Business Incubators (TBIs) support the growth of Chinese startups by providing incubation services, such as free office spaces.

Torch truly enabled China’s high-tech revolution by being critical to the growth of large international tech companies such as Baidu, Lenovo, ZTE, Alibaba, and Huawei. According to Steve Blank, one of the first to write about the rise of China’s VC market, “of all the Chinese innovation programs, Torch is the one that was run like a startup – iterating and pivoting as it learned and discovered. This enabled Torch to evolve with China’s rapidly global economy.”

Output’s estimations of the Torch Program display the importance of Torch parks as an engine of Chinese technology in the economic growth of the country. Thus, the initiative is responsible for 11% of China’s GDP, and more than 10% of China’s industrial value.

[Source: LinkedIn, The ‘Innoway’ incubator of Zhongguancun Science Park, the first STIP to be established, in the suburbs of Beijing]

Seed funding in China brings capital for early-stage startups

Even if the Torch program enabled startups to access financial resources (by 1991, 70 percent of them received bank support), those were generally at a later stage of development. To bridge the financial gap for early-stage startups to access larger investments, the State Council launched the Innovation Fund, known as ‘Innofund’. This initiative provided small and medium tech companies with capital raised from local governments, banks, investors, and enterprises. By 2014, the found backed more than 30,000 Chinese tech startups, allocating over RMB 19 billion ($2.7 billion) to kickstart early-stage projects.

State-sponsored venture capital funding to support state-owned companies

Since the mid-1990s, the Chinese government extensively encourages investments in technology and IT infrastructure. Innovation became one of the only areas in which the government allows venture investments, with state-sponsored VC funds becoming a popular way for local authorities to finance projects. These government-backed funds were meant to invest primarily in state-owned companies with the goal of increasing quality standards to compete with international companies.

To attract even more capital into technology startups, the MOST launched the first of many state-owned ‘guidance funds,’ in 2007. The fund invests in VC funds in targeted sectors of interest, as well as co-investing alongside other VC firms. In 2018, there were more than 2,000 operating guidance funds, with total funding reaching RMB 5.3 trillion ($790 billion).

[Daxue Consulting – The history of the VC market in China]

Foreign investment in China represents a third of China’s venture capital investments

In 2018, foreign VC funds contributed to more than 30% of startup investments in China, most of them using USD to raise funds. Nonetheless, an increasing number of these foreign VC firms are now considering raising funds in China using its local currency, Renminbi (RMB). Since the 2010s, RMB funds are becoming increasingly attractive to foreign investment in China. Thus, non-RMB funds are not currently allowed to exit via IPO on domestic exchanges, an option only made available by RMB funds. Overall, local-currency funds benefit from less regulatory supervision and greater flexibility regarding the sector of investment.

[Data source: Pitchbook, 2018 Chinese VC deals by investor location]

How innovation and Chinese tech giants shape the Venture Capital market in China

China’s VC market has seen a dramatic rise over the past five years, heavily relying on robust financial infrastructures. A strong regulatory system, open market, and the diversification of ways of exiting build this financial pedestal. Aside from this trend, the distinctive growth story of the tech investments in China can be explained by the two following trends:

Entrepreneurship promotion and innovative ecosystem

In 2014, Premier Li Keqiang introduced the principle of “Mass Entrepreneurship and Innovation” to support the development of innovative startups. Since this announcement, the government has created favorable conditions for the development of micro-companies. Tax Incentives for Mass Entrepreneurship and Innovation cut the corporate income tax of small businesses by half, and days required to start a business in China have considerably fallen from close to 30 down to less than 9.

[Data source: World Bank, how long it takes to start a business around the world]

According to the Global Innovation Index (GII), China is gradually closing the gap with other highly innovation-skilled players such as Germany and the United States. The country leapfrogged from the 26^th place in 2016 to the 14^th in 2019. The index lists knowledge and technological output as the first area of capabilities of China to thrive into global innovation. With 7.4 million university graduates in 2017, China has boosted the number of students qualified for higher education. In 1997, only 5.5% of college-aged students were enrolled in universities, against 55% in 2017. This growing educated population represents a significant pool of knowledge to nurture research and technological outputs.

If capital such as R&D expenses is commonly regarded as the driving force behind scientific innovation, startups born from theses researches foster Venture Capital firms that seek return on investment from these highly promising new-born companies. From the 1980s, capital injected to promote entrepreneurial spirit and build an innovative ecosystem of incubators eventually enabled the Venture Capital market in China to bounce in recent years.

Unicorn startups in China

The intertwined links between the growth of an innovative technology ecosystem and the Venture Capital market in China can be assessed through the number of unicorn startups in China. These privately held startup companies with a value of over $1 billion represent an indicator of the degree of implication of both VC firms and tech startups in the Chinese innovation landscape.

[Data source: Deloitte, Location of Unicorn startups in 2019]

Baidu, Alibaba, and Tencent: Venture Capitalists gluttons

Chinese tech giants, known by the acronym BAT (Baidu, Alibaba, Tencent) dominate the Chinese consumer journey, providing an extensive range of services that cover every segment of daily-life activities. Initially, each of these companies started with a single business. Baidu provided an internet search engine, Alibaba was a B2B marketplace, and Tencent was a messaging application. As Chinese consumers quickly embraced mobile internet technologies, BATs rapidly expanded their strategies to meet consumer needs.

As BATs want to capture every minute of the day’s availability from Chinese consumers, they represent a significant investment force in startups in China. They invest through their corporate funds, a practice called Corporate Venture Capital (CVC). According to Pitchbook, the top three technology companies in China had made more than 920 Venture Capital investments by 2018. Importantly, the Minister of Science and Technology has publicly stated his strategy to use BATs to accelerate the country’s leadership in three strategic sectors: Baidu oversees accelerating autonomous driving, Alibaba the smart cities, and Tencent the computer vision.

The government’s involvement in BATs’ strategic axes and their investments echoes the multiple funds-of-funds that have accompanied tech investments in China since 2007. For example, BATs have invested in nearly a third of Chinese Unicorn startups. Recently, Baidu, Alibaba, and Tencent all invested in the rise of the short video apps lead by ByteDance.

[Daxue Consulting – The mechanisms behind the Venture Capital market in China]

The ‘capital winter’ was there before the Coronavirus

The venture capital investments of the past five years fostered a new generation of startups, from Tiktok’s parent company ByteDance, to the ride-hailing giant Didi Chuxing. 2018’s forecasts about the Venture Capital market in China were still predicting the trend to keep its growth pace towards more deals backing the Chinese startups. However, after five years of exponential growth, the trend is now reversing.

The second quarter of 2018 marks the peak of tech investments in China, with digital-payment giant Ant Financial closing a record US$14 billion deal. In the meantime, lifestyle-services giant Meituan-Dianping raised US$4 billion, while Q1 saw Didi Chuxing secure a US$4.6 billion investment. By comparison, 2019 Q2’s largest venture deal was a $1 billion investment in JD.com’s affiliate healthcare branch.

[Data source: Crunchbase, 2016-2019 Chinese VC deals, and dollar volume]

The tech investments in China plummeted from US$93.8 billion in 2018 to less than US$40 billion in 2019, evidencing the ‘capital winter’, which defines a significant slowdown in fundraising and investment activities. As China increasingly positions itself as the engine of global innovation, which factors precipitated the winter for the Venture Capital market in China?

Investors are becoming more cautious than ever

Alexandre Dorangeville, vice-president at Rochefort & Associés, a cross-border investment bank, told Daxue Consulting the VC market in China is likely to come at the end of a cycle.

“Some companies – Ofo, Luckin Coffee are the classic cases – displayed the ability to burn cash without showing any ability to become profitable.” 2018 set the expectations of the investors very high, and the results have not yet come up to the desired outcomes. Additionally, poor post-IPO performances of several Chinese tech companies, including electric car maker NIO and smartphone manufacturer Xiaomi achieved to undermine investor’s confidence.

However, the sector is far from depressed. Financial data provider company Preqin estimates the amount of capital waiting to be deployed of Asia-focused Venture Capital firms to be about $95 billion. It is not the shortage of money, but rather that investors are more critical and selective. As a sign that investors behave less risk-taking, Bruno Bensaid, angel investor at Shanghaivest, observed that early-stage startups have been hit the hardest.

Trade War worsens the general economic downturn

The trade war and the general slowdown in the Chinese economy also affected startup investments in China. In 2019, the U.S. government blacklisted a swath of Chinese tech companies, including telecommunication giant Huawei, and the Alibaba-backed AI startup Megvii. As the United-States remains a hot choice for Chinese startups to exit via IPOs, the trade war affects foreign investment in China, who have limited exit options. Another blacklisted company, the most valuated AI Chinese startup SenseTime, was reported scrambling to survive after losing access to U.S semiconductors, necessary for the continuity of its operations.

On the bigger picture, the development perspectives of Chinese startups are intrinsically linked to the country’s economy. However, it is showing clear signs of deceleration, with a historically low level of growth.

Assessing the Coronavirus impact on tech investments in China

While the Venture Capital market in China relies primarily on meetings between investors and co-founders, travel restrictions froze the entire industry. As a result, the number of deals during the Coronavirus drop-off to nearly zero during the last two weeks of January 2020. Instead of canceling its meeting with 30 startups, Sequoia Capital China decided to organize an online pitch contest during the quarantine.

The Coronavirus impact on startup investments in China pushed  the ongoing trend towards further caution, said Dorangeville. According to him, assessing the impact of the crisis on the portfolio is the immediate task for investment funds to carry out. “The teams are currently focusing on existing assets and redirecting their cash to portfolio companies to ensure their survival, rather than investing in new deals.”

In the first quarter of 2020, we saw the first contraction of China’s economy in more than forty years. According to data published on April 17, 2020, by the National Bureau of Statistics, the GDP officially plunged by 6.8% compared to the first quarter of 2019.

Thus, the winter could be longer for tech investments in China.

Changes in consumption and tech advancements from the Coronavirus in China

During the epidemic, more than 20 province’s government worked with technology companies to build AI solutions to the Coronavirus in China to report epidemic related data and feedback, providing invaluable advice for public crisis management of priority populations. Part of the tech advancements from the Coronavirus in China, we reported the deployment of disinfection robots in hospitals, big data-powered QR codes and smart image reading systems.

Even if the Coronavirus created a fertile environment for AI, big data, and robotics developments in China, it is not likely to foster a new breed of highly promising startups. Indeed, tech advancements from the Coronavirus in China responded to a specific demand to contain the outbreak.

However, results from Daxue Consulting’s analysis during the Coronavirus show great changes in Chinese consumers’ habits. According to Daxue Consulting’s report, more than 70% of the Chinese tried at least one new service for the first time. The highest are online learning and working from home apps, followed by live streaming and online diagnosis. These online services are will likely keep a strong growth, with 73.6% of people saying they will continue to use it online after the epidemic.

[Data source: Daxue Consulting research, changes in Chinese consumer behavior after the Coronavirus outbreak]

As far as the Coronavirus created a boon for innovation in China and new habits of consumption, does it necessarily mean new opportunities for startup investments in China?

Could Startup investments in China eventually bounce back?

According to Pitchbook, there were 66 deals for the week ending on March 28, 2020. This is the most of any week so far this year and just below the figures from the same time last year. Online learning gaining the most traction from the Coronavirus, Chinese online education startup Yuanfudao managed to raise US$1 billion.

Dorangeville said the post Coronavirus impact on startup investments in China is likely to see Corporate Venture Capital –BATs’ funds being the largest ones on the Chinese VC market – taking the opportunity to close exclusive deals. CVCs in China have a longer-perspective in their investments and the cash available to look at current deals. They will therefore be better able to restart bargaining at low prices by being one of the only sources of financing for the Chinese startups.

“However, this will only be the immediate impact of the Coronavirus,” says Dorangeville, “On the long-run, I think that the 2019 trend will be reinforced after the Coronavirus crisis: investors in China will be even more cautious, taking distance with cash-burning business models and being more active in their post-investment portfolio management companies.”

Author: Maxime Bennehard

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This article The venture capital market in China: Could the Coronavirus eventually revive startup investments? is the first one to appear on Daxue Consulting - Market Research China.

In this episode of Daxue Talks, Steve Hopkins, a China’s fintech specialist, discusses the Coronavirus crisis’ repercussions on fintech in China.

Hi everyone, my name is Steve Hopkins. I’ve been operating within the Chinese fintech industry for the past several years, working at Chinese hedge funds, robo advisors, cryptocurrency investment banks and wealth-tech start-ups across Mainland and Hong Kong. I’ve been studying Chinese language and culture for the past 10+ years and I’m the co-founder of The China Guys. TCG is a firm full of professional Chinese watchers that track regulatory, economic and policy optics within China’s business landscape and present them indigestible bite-sized pieces through newsletters and research articles. For clients with more specialized needs we also provide tailored consultative services within the Chinese market. We’re newly started but I would love it if anyone listening to this would check us out at TheChinaGuys.com. I’m excited to be presenting this talk for Daxue Consulting and let’s get started.

Full transcript below:

How has the coronavirus outbreak impacted China’s fintech ecosystem?

So firstly before answering this question, I think it’s right to say first of all that it’s terrible to see the crippling effect that the coronavirus has had on China and now that it’s beginning to spread to a few other countries around the globe, our hearts really go out to everyone affected and I’m personally encouraged to see the sort of international support that’s beginning to bring people together across borders and cultures.

But, now getting back to the question of how the coronavirus has influenced fintech in China – in terms of Chinese fintech it’s really had a pretty lasting impact, but it’s fairly immeasurable until everything is settled down. so, Because of the comprehensive economic depression that this virus has brought, private funding has all but dried up. Which means that SME’s are cut off from external liquidity with their own reserves either being spent or quickly bottoming out and this I guess in turn had led to the central government mandating that banks across the country relax lending requirements for SME’s during this time, but – well that will buy time for these SME’s that are kind of getting to the point of a cash crunch, at the end of the day, several months or quarters down the road, it’s also going to add additional pressure to the overall Chinese economy at large, particularly the financial industry – to this banking system that’s already been overburdened by bad debt and high default rates just by adding more bad debt and high default rates on to that. And so, I’m not quite sure that there’s been much fintech innovation directly driven by this outbreak. There might be a new appreciation for digital payments and the e-commerce industry in general as people are trying to minimize exposure and human interaction to try to contain the spread of the virus, but I can definitely see the general fintech environment rallying after the entire society begins to normalize, people start getting back into their old routines, etc. and so – it’s pretty simple to see why the central government has their own economic benchmarks that they’re trying to hit, for growth and they’re going to basically do whatever they can to try to hit those targets. And so, they’re going to flood the industry I project with capital to show their support for fintech – it’s a priority industry, so it’s that simple.

When you have the capital, when you have the governmental support within the Chinese market, you’re going to have kind of a re-blossoming of the old innovation that was taking place before the industry got hammered by the virus.

Any questions? We will find an expert to answer them. Drop your questions in the comments or send us an email – dx@daxueconsulting.com.

This article Daxue Talks transcript #54: The Coronavirus crisis’ repercussions on fintech in China is the first one to appear on Daxue Consulting - Market Research China.

Jump to the question:

• 1:10 How has the Coronavirus outbreak impacted China’s fintech ecosystem?

Daxue Talks is a show powered by daxue consulting, a china-based strategic market research company founded in 2010! With Daxue Talks, you will stay up to date with all the latest business updates in China.

This article Daxue Talks 54: How has the Coronavirus outbreak impacted China’s fintech ecosystem is the first one to appear on Daxue Consulting - Market Research China.

In this episode of Daxue Talks Steve Hopkins, a China’s fintech specialist talks about the different crypto currency lessons from China.

Full transcript below:

Hi everyone, my name is Steve Hopkins. I’ve been operating within the Chinese fintech industry for the past several years, working at Chinese hedge funds, robo-advisors, crypto currency investment banks and wealth-tech start-ups across Mainland and Hong Kong. I’ve been studying Chinese language and culture for the past 10+ years and I’m the co-founder of The China Guys. TCG is a firm full of professional Chinese watchers that track regulatory, economic and policy optics within China’s business landscape and present them indigestible bite-sized pieces through newsletters and research articles. For clients with more specialized needs, we also provide tailored consultative services within the Chinese market. We’re newly started but I would love it if anyone listening to this would check us out at TheChinaGuys.com. I’m excited to be presenting this talk for Daxue Consulting and let’s get started.

Who is driving crypto currency innovation in China?

So again, this gets back to the question one of who is driving overall innovation. I think it’s pretty cyclical, starting from the government. The government is saying that we realize the power of blockchain technology and of course, crypto currency is one of the better-used cases of blockchain technology and they’re saying to these large corporations to the financial institutions within this entire financial system and saying, we want to develop it this way – you guys go ahead and make it happen, you have our support. And so, then this is opening a lot of liquidity, a lot of market opportunities for some of these smaller players, particularly the start-ups to come in and really test out a whole bunch of ideas. And then they also – filling in within this cycle they have the operational freedom and autonomy to really test out some of their more experimental used cases for blockchain technology for crypto currency. And so it all kind of goes around in a circle so I would say that the very top of this is probably the government, who is saying – we support this, go ahead make it happen and then all the players have pretty intermixed within that and their role of trying to derive crypto currency innovation within reach.

What have the US and other countries learned from China’s crypto currency development?

So, again everyone’s really learning from each other. I think that the US – at least the fintech players, they haven’t necessarily learned about new used cases from China necessarily – but I think on a broader level, global regulators have definitely learned from each other and so particularly China. China has been very interesting where they straight up ban – or actually in the very beginning, in 2013 I believe they came out and said that they were – stood very supportive of crypto currency. Thought that there were some very good used cases for it that could further the national priorities and then in 2017 they came out and said – ban on everything – crypto currency, ICO’s are dead in the water, crypto currency trading is in a very negative spot of these crypto exchanges that were operating within China, Binance – B-On they suddenly find themselves in a very tricky position and need to exit the market while still servicing their Chinese clientele.

But then what’s interesting is that at the same time, the Chinese government goes over to the PBOC and says – we think that crypto currency can be contrary to – at contrast with investor interest, but we still see the used case for this technology and wouldn’t it be a really cool idea if we were able to onboard some sort of electronic RMB sort of product that then allows our national currency to A) have better access to the global community, and B) give us a little bit more insight into where our money is actually flowing in and out. And so, because of that, you hear a little bit of news coming out about some recent head wave that the PBOC has made on developing this digital currency and how they are working with some of the bigger payment providers within the Chinese financial industry to start the integration process. Ask those questions. How is this going to work out and do you guys have the capabilities to sort of onboard this new type of payment system? How can we integrate everything etc., etc. – and so suddenly what you see is sort of a global response to this, because obviously no government wants to be left out of this kind of global innovation race, least of all the US who has a whole lot to lose if suddenly the renminbi has increased market access to the international financial community, the trade community, etc. and really in a very much real sense – could over the long term threaten the status of the US dollar as the global de-facto currency. And so, you hear US regulators maybe not talking to the Fed about coming up with their own digital dollar, but they started getting the conversations going about crypto currency. What are the benefits of this? What is this technology at its core? And then you also have the private corporations – like Facebook with their lever project who come up and say – look, the US government is having the right sorts of conversations, but we want to take this a step further and we want to actually start developing this US dollar-based digital currency and obviously someone like Facebook has the resources both fiscal and relationship-based to kind of take the approach to getting this project started. And so, I would say that getting back to the question, that it’s not necessarily that there are one or two specific lessons that the US and other countries have learned from China’s crypto currency development, but it’s kind of the broader top-down approach that Chinese regulators have towards crypto currency, towards mitigating the risks towards investors that crypto currency investments present, but still the long term development, strategic development of this technology – those are the sorts of lessons that I think the US at a governmental level are starting to take away from the Chinese approach to the technology.

Any questions? We will find an expert to answer them. Drop your questions in the comments or send us an email – dx@daxueconsulting.com.

This article Daxue Talks transcript #53: Crypto currency lessons from China is the first one to appear on Daxue Consulting - Market Research China.

Jump to the questions:

• 1:10 Who is driving crypto currency innovation in China?
• 2:40 What have the US and other countries learned from China’s crypto currency development?

Daxue Talks is a show powered by daxue consulting, a china-based strategic market research company founded in 2010! With Daxue Talks, you will stay up to date with all the latest business updates in China.

This article Daxue Talks 53: What is driving Crypto currency innovation in China? is the first one to appear on Daxue Consulting - Market Research China.

The next guest on Daxue Talks is China’s fintech specialist, Steve Hopkins. In this China business vlog, we are talking about the deployment of blockchain technologies by Chinese banks.

Full transcript below:

Hi everyone, my name is Steve Hopkins. I’ve been operating within the Chinese fintech industry for the past several years, working at Chinese hedge funds, robo-advisors, cryptocurrency investment banks and wealth-tech start-ups across Mainland and Hong Kong. I’ve been studying Chinese language and culture for the past 10+ years and I’m the co-founder of The China Guys. TCG is a firm full of professional Chinese watchers that track regulatory, economic and policy optics within China’s business landscape and present them indigestible bite-sized pieces through newsletters and research articles. For clients with more specialized needs, we also provide tailored consultative services within the Chinese market. We’re newly started but I would love it if anyone listening to this would check us out at TheChinaGuys.com. I’m excited to be presenting this talk for Daxue Consulting and let’s get started.

Deployment of blockchain technologies

Hhow is blockchain currently being used in China’s banking sector?

Right, so obviously the Chinese government on both a national and a provincial level have doubled down on their focus, on their priority to the continued development of blockchain technology. And so, because of that there’s really been developments in just about all fronts of the financial industry with regards to blockchain technology, from cross border payments and trade finance to asset management or wealth tech as you might have heard it be called and supply chain finance. And so, a common example to go to is the PBOC’s – the People’s Bank of China – their efforts to develop a digital currency tied to the value of the RMB. But a lesser-known use of blockchain technology is for the industry called Supply Chain clients and I think it’s actually pretty interesting and something that hasn’t got as much press as the digital RMB so I’ll give that as an example from now.

So within supply chain finance, there is a huge issue that there is a lack of reliable and transparent methods for SME’s deep within a large corporation supply chain to access liquidity through loans, through factoring, any sort of financial services like that and so right now, the banking arm of Pingan’s insurance has an interesting solution that they’ve taken to approach this issue. They’re using blockchain technology to track transactions deep within corporate supply chains, to allow smaller SME suppliers to use the reputation of these larger corporations to access liquidity and I’ll explain what all of this means.

So, let’s put some names to this example. You have a well-known auto manufacturer, let’s say Nissan Motors. Nissan is what’s known as the anchor corporation or the top-level company that’s coming out with the final product and is at a level of operations that a lot of these financial institutions trust that they’re going to pay their debt obligation. So basically, if Nissan says yes, I owe you 10 million dollars, they’re going to be good to uphold that IOU.

But Nissan has – to assemble a single automobile; there are multiple tiers of suppliers that they source all of their materials from. From tires to windows to auto chassis. So, let’s chase that out a little bit.

The chassis manufacturer that Nissan is supplying from, also have multiple suppliers that they’re sourcing their fittings from, those suppliers will have suppliers that they source their sheet metal from and it goes on and on. So, realistically if you chase this out, for all the components that are needed for Nissan to create a single car, you’re looking at a pretty tangled web of very deep tier suppliers that typically get smaller and smaller and smaller in operations the deeper that you go within the supply chain.

So, bringing this back to what Pingan’s doing, what a blockchain-based supply chain finance platform can do, is provide the infrastructure for an ecosystem where all these suppliers can be onboarded and the flow of goods and transactions from bottom to top can be tracked and verified. And so, at the end of the day this sheet metal supplier from our example, can go to a financier – let’s say HSBC and basically take the IOU’s that Nissan has transferred down throughout its supply chain from Nissan to that auto chassis supplier, to the sheet metal supplier and they’ll be able to take it to HSBC and say I’ve received this IOU from Nissan for 10 million dollars and because they have all these verifiable records of the movement of these goods and transactions, HSBC’s risk of saying yes and providing that money upfront to these smaller SME’s is very much lessened and so because of that they can cash out these IOU’s and provide these SME’s much easier and reliable access to capital as a result.

So again, this is just a very long and drawn-out example of the power that blockchain technology can bring and particularly the diverse used cases of blockchain technology within the banking sector, not only in China but within the global financial system.

Any questions? We will find an expert to answer them. Drop your questions in the comments or send us an email – dx@daxueconsulting.com.

This article Daxue Talks transcript #52: The deployment of blockchain technologies by Chinese banks is the first one to appear on Daxue Consulting - Market Research China.

Jump to the question:

• 1:10 How is blockchain currently being used in China’s banking sector?

Daxue Talks is a show powered by daxue consulting, a china-based strategic market research company founded in 2010! With Daxue Talks, you will stay up to date with all the latest business updates in China.

This article Daxue Talks 52: How is blockchain currently being used in China’s banking sector? is the first one to appear on Daxue Consulting - Market Research China.

In this episode of Daxue Talks Steve Hopkins, China’s fintech specialist talks about how Alipay and WeChat are different from Paypal.

Full transcript below:

Hi everyone, my name is Steve Hopkins. I’ve been operating within the Chinese fintech industry for the past several years, working at Chinese hedge funds, robo advisors, cryptocurrency investment banks and wealth-tech start-ups across Mainland and Hong Kong. I’ve been studying Chinese language and culture for the past 10+ years and I’m the co-founder of The China Guys. TCG is a firm full of professional Chinese watchers that track regulatory, economic and policy optics within China’s business landscape and present them indigestible bite-sized pieces through newsletters and research articles. For clients with more specialized needs, we also provide tailored consultative services within the Chinese market. We’re newly started but I would love it if anyone listening to this would check us out at TheChinaGuys.com. I’m excited to be presenting this talk for Daxue Consulting and let’s get started.

How are Alipay and WeChat pay different from PayPal and why are third party payment fees so much lower in China than in the West?

So, I don’t know that’s necessarily a one to one comparison. PayPal is by definition a settlement system, so basically, it’s just a third party that’s acting as an intermediary between two different banks and initiates a transfer of money between bank one and bank two and obviously these banks are representing people here. Because of its business model, because it’s based out of the US which typically has a higher cost of access to financial institutions and capital in general, it’s pretty well optimized for more medium to high-value transactions, again because it has a relatively higher cost per transaction. Due to their bank transfer fees or at least the banks that they’re dealing with, the associate card transfer fees, platform fees, compliance overhead, everything that you can kind of classify into that category.

But Alibaba and Alipay specifically, on the other hand, their primary product isn’t actually a settlement system. It’s a digital wallet, which means that as a user of Alipay, you’re able to connect your bank over to these wallets and then top up these digital wallets. But then you’re able because you’ve already topped up a specific amount of money. You can make a lot of transactions from this Alipay digital wallet to another user’s digital wallet and so because of that each transaction that you’re initiating, going from your e-wallet to another users e-wallet, its distributing that initial top-up fee across a whole multitude of transactions, which means that not only are the initial top-up fees a little bit cheaper than in the United States would be, but also you certainly have a system where you can really take part in a lot of microtransactions, which are transactions of very small amounts, all the way up to medium and large-sized transactions which from a broader perspective means that those initial top-up fees are being distributed around a larger amount of fee bases, which mean that the cost per transaction is actually a lot lower than it would be for a comparative player like PayPal.

The other part of this is because PayPal connects between different banks, you’re only really going to be able to have one transfer as part of a transaction, but because everyone that’s using Alipay is within the Alipay ecosystem so to say – so, if you are user A transferring to user B, there’s not actually really an underlying transfer of money there. Alibaba is just basically able to change the numbers on your ledger that represents how much money you have in your digital wallet, and change in tandem user B’s – the receiver of this money – change the numbers associated with their digital wallet. And so because it’s just changing the numbers rather than actually moving the money through a system, there’s comparatively low – much lower overhead per transaction which overall lowers the total cost per transaction, per user, etc. and so the other part of this is that Alibaba obviously also has a vested interest in keeping cost low so that their users are also directed towards participating in some of their other services. Alibaba is a huge firm, it offers a lot of services, for example, TMall, Taobao – Alipay is the only accepted payment channel for these two services, if you want to purchase on Taobao, you can only really use Alipay, so obviously they want to onboard as many users as they can, they want these users to be comfortable in using this payment channel, etc. – so that it will carry over to some of their other product offerings that the company offers.

Any questions? We will find an expert to answer them. Drop your questions in the comments or send us an email – dx@daxueconsulting.com.

This article Daxue Talks transcript #51: How are Alipay and WeChat different from Paypal? is the first one to appear on Daxue Consulting - Market Research China.