Notes From China: Money and the Internet Are Inseparable
The internet has fundamentally reshaped the way Chinese people use money.
China’s massive population and velocity of growth guarantee that statistics surrounding any of its popular trends are monumental. As impressive as the numbers may be, we believe it is equally enlightening to see how these trends are shaping actual people’s lives.
In China today, money and the internet have become inseparable. This is true not just for mobile payments, but also for investing in funds and wealth management products.
KraneShares’ CIO Brendan Ahern, was recently on a business trip in China and saw first hand how the internet has fundamentally reshaped the way Chinese people use money.
On my first morning in Beijing I immediately check in with my driver Mr. Liu utilizing WeChat, Tencent’s social media application.1 Like most major cities, traffic in Beijing can be intense so I wanted to ensure we had enough time to arrive on schedule.
Mr. Liu’s Buick minivan is WiFi enabled, just like my hotel room, so we are able to communicate on our smart phones via a free phone call on the WeChat app without incurring costly data roaming charges. Mr Liu checked traffic on AutoNavi’s website and confirmed that despite only going eight miles we needed an hour to get from the east side of town to the financial district.2,5
My first meeting is with Tian Hong Asset Management, which recently became the largest asset management firm in China.3 Tian Hong owes its entire meteoric rise to the internet. Just three years ago Tian Hong was relatively small, managing a modest $1.9 billion dollars.4 This all changed when it partnered with the company responsible for handling online transactions for the internet and ecommerce giant Alibaba.5
Before Alibaba’s IPO in 2014 the company spun off its online transaction service Alipay (which offers similar services as PayPal here in the U.S.) into a separate company called Ant Financial Group (AFG). AFG realized that there was great demand amongst Alibaba’s clients to allocate their capital to money market funds that offered higher rates than bank deposits. AFG partnered with Tian Hong to offer its Yu’ebao money market fund to Alibaba’s clients, and the success was practically immediate.
Before the partnership, investors wanting to buy Tian Hong’s money market fund would have had to travel to a physical bank branch. Thanks to Alibaba, Tian Hong raised $120 billion in just 3 years, and it did so entirely online through Alibaba’s platform.6 Tian Hong now has 300 million investor accounts, which is almost the same as the entire U.S. population.7
After my meeting with Tian Hong, I ask Mr. Liu to drive me to Pacific Coffee (a local coffee shop chain similar to Starbucks) to grab breakfast and some caffeine to help with my jet lag. While I am waiting to order, I see customers use their smartphones to scan QR codes using Tencent’s WeChat wallet or Baidu’s BaifuBao wallet to pay for their food and drinks.8 I ask Mr. Liu about what I saw and he explains that cash transactions are becoming increasingly rare and limited to “old” people. Knowing I paid for my meal with cash, I suddenly wonder if I am becoming one of the old people.
Even though I have WeChat downloaded on my phone, Mr. Liu shows me the full potential of the app before we go to our next location. WeChat is like the Facebook of China and can be used for social media, online gaming, free phone calls, and instant messaging.
Both WeChat and BaifuBao also offer users the ability to integrate their financial lives on their smart devices. For example, Mr. Liu explains that he uses WeChat and BaifuBao to pay utilities and credit card bills, split a restaurant meal, and pay for consumer goods like coffee and groceries.
While exploring the apps in my free time between meetings, I discover that WeChat and Baifubao are open architecture platforms that offer third party services such as cab transportation, flight and train bookings, and hotel reservations. I can also buy money market funds, ETFs, and wealth management products right on my phone. Seeing how convenient it is for Chinese people like Mr. Liu to handle their investments through their social media app of choice, it makes me wish I could do the same with my Facebook or LinkedIn account here in the United States.
Mobile payment and online consumer finance are now integral parts of everyday life in China. It is hard to avoid using a smart phone for tasks such as: voice communication over wifi, paying for a coffee using QR codes, investing in money market funds, paying utility bills, and so on.
I have written extensively about how smart phones in China have surpassed TVs and computers to become the primary source of entertainment for Chinese people. Increasingly, smart phones have become the primary mode of banking, wealth management, and so much more.
Krane Funds Advisors, LLC has no relationship with Tian Hong Asset Management.
- Tencent has a 10.97% weight in the KraneShares CSI China Internet ETF as of 6/30/2016.
Tencent has a 2.8% weight in the KraneShares FTSE Emerging Market Plus ETF as of 6/30/2016.Tencent has a 4.02% weight in the KraneShares Zacks New China ETF as of 6/30/2016.
- AutoNavi is a subsidiary of Alibaba.
- Data from Alibaba as of 3/31/2016.
- Eric Johnson, [Oct. 20, 2014] “Alibaba Sparks a Revolution in Asset Mangement in China”, Institutional Investor
- Alibaba has a 9.69% weight in the KraneShares CSI China Internet ETF as of 6/30/2016.
Alibaba has a 1.45% weight in the KraneShares FTSE Emerging Market Plus ETF as of 6/30/2016.
- Data from Alibaba as of 6/30/2016.
- Data from U.S. Census Bureau as of 07/31/2016.
- BaifuBao is a service of Baidu. Baidu has a 8.16% weight in the KraneShares CSI China Internet ETF as of 6/30/2016.
Baidu has a 1.38% weight in the KraneShares FTSE Emerging Market Plus ETF as of 6/30/2016.