
Change agents in 21st century China
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For years, the story line about China’s export-driven economy has been about the weakness of domestic consumption, constrained by low salaries, and by the priority assigned to investment both in the public- and in the private sector
Repressed interest earned on bank deposits further limited the buying power of a middle class struggling to emerge
This view of the Chinese economy, anchored on the comments of respected analysts, faded over the past decade – and rightly so
But the sheer magnitude of the shift – and its harrowing speed – are worth considering,
- not so much because obsessions about trade imbalance tend to take precedence (though they do),
- as to gain understanding of the long-term options available to China’s agents of change
Cyclones of consumerism
As of October ’18, total retail sales of consumer goods in China have clocked close to ¥ 31 trillion ($4.3 trillion at 0.14 USD/¥), a 9.2% year-on-year growth rate, on the back of a 10.2% increase through 2017

For the same period, on-line sales of goods and services, in the classification of the Chinese National Bureau of Statistics, were ¥ 7 trillion ($980 billion), increasing 25.5% year-on-year
With orders placed by mobile taking pole position in this fast moving landscape, third-party payment services have taken both the retail market and the banking industry by storm
Alipay, the preferred means of transaction of e-commerce giant Alibaba , must be given pride of place but, with its dominant messaging service WeChat combined with a digital payment wallet, Tencent has been picking up fast
In frontal competition, the services accelerated the adoption rate of mobile payment, at levels unheard off in the ‘developed economies’, extending their reach beyond online orders, fuelled by QR (quick response) codes and by online-to-offline (O2O) services across China
The extension of third-party mobile applications into personal finance, initially planned as option for Alipay clients to park idle cash temporarily in a dedicated fund, blasted past over-the-top previous projections of mobile transactions
On-line, China’s 2017 total transactions of third-party mobile payment were estimated at $17 trillion, as highlighted by Kleiner Perkins in the Meeker Internet report (May 2018) ….

...and double digit projections for 2018 are well on their way, with total transactions exceeding $15 trillion by mid-year alone– up by 7% over Q4 2017, exceeding $5.87 trillion in Q1-2018 and adding $9.09 trillion in Q2-2018
Hogging data
Over and above the transactions fees from merchants – estimated at approx. 0.6% - the technology firms benefit greatly from the collected consumer data for targeted marketing
On the strength of data driven marketing strategies, mobile technology comes to dominate business-to-consumer sales, supported by the data analytics made available to the merchants and tightening the grip of the payment services on the manufacturers, services and the retail networks themselves
And careful data management gives the third-party mobile services deep understanding of consumer spending at every step, putting the companies at a distinct advantage to evaluate credit-worthiness of both consumers and small-to-medium merchants
With recommendation extending beyond merchandise into a wide array of financial products (loans, investments and funds), finance apps are putting traditional banking on edge with projected credit card fee losses projected at $60 billion in 2020 according to a November 2016 report from EY and Singapore’s DBS Bank, the rise of Fintech in China

Disrupting value chains
The Chinese Internet giants have been seeking opportunities to improve on existing value chains, in retail initially and, more recently, in finance
By applying technological solutions to vast backlogs of inefficient practice, the firms have been making the most of fragmented retail networks and an under-banked financial service
Straining to justify their oversized market valuations of $400 to 500 billion, both Alibaba and Tencent are likely to double down on
- new service markets (bike renting, food delivery, etc.),
- new retail models (inventing shopping models, transforming the logistics suppy chain)
- and financial products, for the consumer and for small-to-medium business
But technology is unlikely to replace existing networks and the firms probably do not contend to
As "Agents of Change", both firms will precipitate deep transformations in the most sedate and unexpected corners - mobile banking is a case in point

Our follow-up notes will discuss
- Ant Financial Services, which grew from the Alipay transaction payment service into the world's largest monetary fund
- the international potential - and roadblocks - of China's Internet firms