In Parts 3 and 4 of the Ant Group series, we discussed the market structure and trends of the Chinese consumer and SMB credit markets that Ant successfully exploited to garner success for their CreditTech function. In Part 5, we now turn to China's investment markets and provide a backdrop of the nature of the industry, in addition to explaining the key factors that precipitated Ant's success.
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The Chinese Investment Markets
As discussed in previous articles, the Chinese people are getting richer and richer with personal disposable income in mainland China increasing by an average of 5% to 6% year-on-year during the 2015 to 2019 period. Along with the rise in income, the Chinese people are having more and more investable assets (i.e. liquid and near-liquid assets such as cash, mutual funds, stocks, bonds, and certificates of deposit), with a total of RMB160 trillion in personal investable assets for China as a whole in 2019, according to Oliver Wyman. This is an 11% increase from RMB144 trillion in 2018.
Personal investable assets in China have traditionally been channelled into savings accounts or fixed term deposits earning relatively low interest rates, invested in highly risky endeavours such as peer-to-peer (P2P) lending, or funnelled out to illiquid real estate investments. Mutual funds were not a popular choice of investment product, for various reasons, which we summarize here.
Investing in Funds was Costly and Inconvenient
Traditionally, investing in mutual funds wasn't easy. Interested investors had to go to a physical bank branch to fill out the relevant paperwork to carry out their transactions, while bank staff did not necessarily recommend the most suitable fund products for clients. Banks typically charged transaction fees ranging from 1% upwards and often encouraged clients to buy and sell excessively in order to maximize commission. Consequently, there was a substantial trust rift between buyers and sellers, as investors were oftentimes misled into buying investment products that exceeded their risk tolerance.
For lower income investors and young people who didn't have much savings left after paying for their rent and daily expenses, there was also an additional hurdle of high minimum required investment amounts, with lower bounds being as high as a few thousands or tens of thousands of yuan to invest in mutual funds and trust companies.
High Volatility in Stock Market and Mutual Fund Returns
The Chinese stock market was historically very volatile, due to market manipulation activities, speculative buying and large volumes of off-site (i.e. not conducted through an authorized brokerage) margin trading, and overreactions to quantitative easing measures. Mutual fund returns reflected this underlying volatility, so many people in China thought that channelling their money into the real estate sector would be a safer investment with the general increasing trend in housing prices. Other investors sought alternative investment options such as peer-to-peer lending, although most investors significantly underestimated the credit risk involved, leading to the huge cascade of P2P defaults.
The majority of Chinese people, especially the older generation, did not have a very broad knowledge of the investment markets or investment products in general. Consequently, many people just held their investable assets as cash or deposited their money into traditional fixed term deposits, in addition to buying real estate property which was a form of investment they were more familiar with.
In Step Yu'ebao and InvestmentTech
Ant first launched Yu'ebao, a money market fund, for users of the Alipay app to earn some basic interest on their deposited money. Yu'ebao was initially managed by Tianhong Asset Management, an asset manager that is majority owned by Ant. Later on, Ant expanded to allow third party MMFs on the Yu'ebao platform, in addition to expanding to the mutual fund markets by offering an extensive range of mutual fund options from third party financial institution partners.
Yu'ebao was launched in 2013 as one of the first money market funds in China that was easily accessible to the public. Funds deposited in Yu'ebao are linked to users' Alipay accounts which can be used to pay for their purchases on Alibaba, while interest is paid out daily and deposited money can be withdrawn at any time.
Yu'ebao is the largest money market fund in China with over a third of the Chinese population having money invested in the fund. It also became the largest money market fund in the world in 2017 with over RMB1.8 trillion in AUM at its peak, although this title has since been taken by funds from JP Morgan and Fidelity (see a more thorough discussion in Part 2 here). As of Q1 2020, Yu'ebao has RMB1.26 trillion in AUM.
General InvestmentTech Platform
Ant's main InvestmentTech platform connects 170 partner asset management companies with customers through the use of AI-based matching algorithms that provide retail investors with a wide range of transparent and personalized investment products to choose from. Ant focuses greatly on creating a user-friendly online platform, where interested investors can easily browse different fund options with financial product suggestions that are presented in an easily comprehensible manner, allowing users to develop a clear and thorough understanding of their choices.
The minimum required investment amounts for funds listed on the InvestmentTech platform are typically only in the tens or hundreds of yuan, while commission fees are also very low with an average of approximately 0.1% compared with the standard 1% that is usually charged by Chinese banks. The low investment amount required and cheaper fees, on top of the convenient and user-friendly online platform, have attracted a wide range of customers, including many new investors who were previously unable to participate in the investment markets.
As of June 2020, Ant's InvestmentTech platform is the largest online investment services platform in China with an AUM of RMB4.1 trillion generated through the platform and over 500 million users. Read more about InvestmentTech in Part 2.
InvestmentTech's Success Factors
Here we discuss the main factors leading to Ant's success as the largest investment services platform provider in China.
Macro Factor #1: A Rich and Growing Market
As the Chinese people were and continue to be getting richer, they needed somewhere to invest and grow their wealth. However, there weren't a lot of liquid investment options, so people have either kept their wealth in cash, invested in real estate properties, or resorted to much riskier investment options such as peer-to-peer lending which has since collapsed. Whilst mutual funds did exist, they were not easily accessible, and money market funds were extremely uncommon to the average investor. Making mutual funds and MMFs broadly available to a population that was eager and able to invest was key to Ant's success.
Regulatory Factor #1: Stabilizing Policies for the Stock Market
While the Chinese stock market has been historically quite volatile, in recent years the central government has implemented policies to tighten regulation and promote the growth of a more stable stock market. Specifically, market manipulation activities have been cracked down on, and since 2018 companies offering off-site funding for margin trading were banned from participating on stock exchanges. In the past, those who wanted to gamble on the stock markets could obtain margin loans with excessively high leverage ratios through unreputable "shadow" lenders that offered far higher levels of leverage than similar margin trading activities sponsored by authorized companies. Although there are ways to circumvent the ban on off-site margin trading, such activities have declined significantly as a whole and the stock market has become a much more attractive place for people to invest.
Regulatory Factor #2: Tighter Risk Disclosure Regulations
In 2018, the Chinese government also implemented a regulation that required the disclosure of the risky nature of investment products. Before this new law took place, consumers were frequently deceived into investing in products or engaging in activities (such as peer-to-peer lending or general investment scams) that were risky but supposedly promised a full return of principal. Since the law specifically disallows the advertising of a full principal return guarantee, Chinese investors could more realistically evaluate the riskiness of their investment options. Consequently, more money has flowed into the mutual fund markets, which generate (relatively) moderate returns but have substantially lower counterparty risk.
Company Factor #1: An Integrated Ecosystem with Alipay
Having a solid, integrated ecosystem with Alibaba allowed Ant to attract many users who might have even been new to money market funds and mutual funds.
Yu'ebao - Seamless Integration with Alipay
Ant could effectively attract users to use Yu'ebao since the majority of Chinese people living in bigger cities were already using Alipay to buy products from Alibaba or partner sellers (as of June 2020, the Alipay app had over a billion users - see Part 2). Yu'ebao lets users earn interest on the money deposited in their Alipay account, while still maintaining the liquidity they need to spend or withdraw at any time. As such, Yu'ebao functions as a complementary service for Alipay users to earn higher returns on their idle money.
General InvestmentTech - Financially Educating Users
Ant promoted their InvestmentTech platform on the Alipay homepage, where users who may not have been very financially savvy could click to learn about relatively liquid investment options that generate higher returns than Yu'ebao. The InvestmentTech platform is easy to navigate, while product choices are explained in easily comprehensible terms, allowing new investors to easily understand the wide range of investment options available.
Company Factor #2: Bridging the Trust Gap between Buyers and Sellers
Since there were numerous instances of banks recommending funds to customers on the basis of commission fee rather than based on customers' risk profiles, the Chinese people possessed a general distrust of bank officers and their recommendations. Ant bridges this trust gap by relying on comprehensive AI algorithms that generate recommendations based on individual user information, and presents these recommendations in a transparent, clear and comprehensive manner, so investors can know what they are getting into.
Company Factor #3: Digital Inclusive Finance
Whereas Chinese banks and asset managers traditionally targeted only retail investors with larger sums of money (also see more on financial inclusivity in Parts 3 and 4), Ant lowered the threshold for participants to enter the investment markets with lower required investment amounts and significantly lower transaction fees. This opened up the markets to new investors including young people, who didn't have much savings, as well as lower income earners who still wanted to earn some return on their money. Moreover, the digital platform makes it significantly easier for investors to browse for information and transact.
See Part 6 for the continuation of this article.
Check out the entire Ant Group series here:
Ant Group Updates:
Investing in China (Equities)
Investing in China (Fixed Income)
Glossary of All China-Related Terminology:
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