Alibaba (BABA) chief Jack Ma recently teased investors looking for the next big China Internet play by discussing a “definite” future listing for his e-commerce company’s PayPal-like affiliate Alipay.
But for another group of shareholders — investors in Chinese bank stocks — Ma’s hint should be read as a stark warning.
Investors in Chinese bank stocks are under pressure because Alipay and other financial services operating exclusively over the Internet are spreading like wild bamboo into market territory traditionally controlled by brick-and-mortar banks. And if Alipay follows in the footsteps of Alibaba, which in September raised a record $25 billion in New York, bank stocks could turn even less attractive.
Alipay, online messaging leader Tencent’s (TCEHY) Tenpay and search engine Baidu’s (BIDU) Wallet have already spread their roots into bill-paying and money-transfer services. Meanwhile, over the past two years or so, mom-and-pop savers have been shifting money from low-yielding bank accounts into online-accessible mutual funds such as Alibaba’s Yu’e Bao and Baidu’s Bai Fa. Even small-business loans are now available through online financiers.
Bank stock investors would do well to factor in this competitive pressure and consider weeding out some of their more vulnerable holdings. Mentioned as underweight candidates by Chinese bank stock analysts in recent weeks were Bank of Communications (BCMXY), China Minsheng Bank (CMAKY), China Everbright Bank and China Merchants Bank (CIHHF). Each has been cited as falling behind in the race to win online clients.
But, in fact, the entire banking sector is feeling heat.
The CSI China Mainland Bank Stock Index, which tracks all 16 bank stocks listed on the Shanghai and Shenzhen exchanges, has declined 20% since it’s last big peak in February 2013, which was a time when Alibaba and others were just starting to expand into online financing.
In early November, the index suddenly rose from a monthslong slump and hit a year-to-date peak November 11. But since then, the index has fallen more than 5%.
The index’s rise in November may have been tied to a rally for bank stocks in the run-up to the Shanghai-Hong Kong Stock Connect program, which launched November 17. The program is letting non-mainland retail investors trade Shanghai stocks for the first time. Since launch day, the index has declined.
Make no mistake: Mainland banks still enjoy strong government backing and are very much in the game of online financing. Most banks from Industrial and Commercial Bank of China to the Bank of Ningbo offer a range of online services, from wealth product management to mobile-phone money transfers.
Moreover, many of these new nonbank online companies work closely with banks. Tencent’s popular communication app WeChat links users to their existing bank accounts. Money invested in the Yu’e Bao fund is funneled into banks with which the asset manager, Alibaba partner Tianhong, has negotiated interest rate contracts.
But by licensing the financial units of online service providers, the government has already signaled a desire to inject more competition into the banking sector. In turn, that’s forcing big changes at China’s banks, which employ more than 2 million people at tens of thousands of branch offices across the country.
“Financing through the Internet in China is designed to… achieve the most efficient allocation of capital,” according to a recent analysis by the bank-connected broker Agricultural Bank of China International Securities. “In due course, financial institutions that rely on monopolies are finding that their advantages are being eroded away by new, Internet financial services. They’ve even been forced to change their old patterns of behavior.”
Money raised through an Alipay listing, which Ma told state television CCTV he hopes happens on a mainland exchange rather than overseas, would give the Alibaba family more money to invade bank territory. He did not mention of a possible timetable for going public, though, which has given investors in bank stocks a little time to adjust their portfolios accordingly.
As of this writing, Eric Johnson did not hold a position in any of the aforementioned securities.