Alibaba's Yu’e Bao system
As the U.S.-China trade war continues, reports of industries potentially damaged by the skirmish are rolling in. Many experts believe that the trade war will have a strongly negative effect on China's economy, which is facing an economic slowdown and high levels of debt. Industries that face higher costs due to U.S. tariffs on China include the electronics, chemicals, and plastics industries. Chinese retaliation will raise costs for its consumers, especially in the areas of agriculture and steel products. So far, tariffs haven’t been placed on any service sectors, but this doesn’t mean that service sectors will go entirely unscathed. What might happen to the Chinese fintech industry as a result of the growing trade conflict?
China’s fintech industry includes sectors like digital payments, consumer and small firm lending, online wealth management, and online insurance. The industry caters in large part to lower and middle class consumers that China’s government is hoping will purchase more goods to make up for a declining export sector and waning fixed asset investment. The fintech industry, along with China’s e-commerce and internet-related industries, is growing at a faster rate than the rest of the economy. Therefore, it is an important source of growth.
Many Chinese shoppers purchase foreign goods online due to their better quality. Chinese cross-border online retail spending was estimated at about $100 billion in 2017, and Chinese cross-border online sales in total were estimated to be $140 billion. Online sellers and shoppers buying or selling goods in the tariff categories will see costs go up as the additional fees are imposed. This is likely to result in reduced sales for both buyers and sellers, and therefore fewer digital payment transactions with regard to foreign e-tail (electronic retailing) markets. While a survey by Paypal found that most Chinese shoppers may be more quality-sensitive and less price-sensitive in buying goods from the U.S., this doesn’t mean they won’t look to other sellers if they can purchase quality products elsewhere. It will certainly harm sellers of high-tech products.
In addition, there will be knock-on effects throughout China’s economy from the trade war. Increased costs from tariffs will contribute to China’s struggle to maintain economic growth and reduce corporate debt. These two factors, coupled with a regulatory push to deleverage high levels of debt, are likely to reduce liquidity in the economy. As a result, we can expect available loans to decline. It seems highly plausible that this would extend not only to the banking sector, but also to the online lending sector, which may start to channel funds from formal financial institutions or from other individuals and firms. As there is less money to go around, there will be fewer loans available to consumers and small businesses. Undoubtedly, this will negatively impact the sector.
As people have fewer funds, they are also likely to invest less through online wealth management services. China’s online wealth management services allow users to invest in assets like money market funds and funds of funds. For example, Alibaba offers Yu’e Bao for online shoppers to invest some of their leftover cash in a money market fund, while Creditease offers a fund of funds covering a variety of asset categories. These investment outlets have become increasingly popular, since China has few other investment outlets with stable and strong returns. Due to the negative effect of the trade war, available funds for private investment may decline.
Online insurance is also likely to be affected, if overall economic activity slows. Online insurance companies like Zhongan Insurance have created products that are closely tied to online purchases. For example, Zhongan offers insurance covering e-commerce product returns as well as travel insurance that can be purchased through Ctrip, a travel website. As e-commerce is affected, companies like Zhongan Insurance will also be affected.
Even though China’s services industry is not yet directly subject to tariffs in the U.S.-China trade war, fintech services are likely to be adversely impacted due to a slowdown in cross-border business with the U.S. and a worsened economic slowdown and credit crunch. The government is acutely aware of the ramifications of the trade war, however, and is attempting to help Chinese firms find alternative markets to source from and sell to. This is a prodigious task, as the tariff categories are numerous. As with goods that are traded via traditional means, China’s e-commerce sector may end up turning away from American products and consumers and toward European or Asian markets. This process of switching markets will help to buoy China’s e-commerce regime and reduce the negative effects felt by the fintech industry, which closely complements online activity.
In the short run, however, it seems there is no escaping the unfavorable effects of the U.S.-China trade war. It is highly likely that the fintech sector, like many other sectors in China, will be adversely impacted by the conflict.