Consumer Meteor Strikes China’s State Dinosaurs

April 23, 2013 Leave a comment

Updated April 22, 2013, 9:52 a.m. ET

Consumer Meteor Strikes China’s State Dinosaurs

By TOM ORLIK

A common worry about China’s economy is that vested interests in the state sector will block reforms needed to raise household income and consumption. State-owned enterprises are certainly influential. But new technologies and demanding consumers can make them look less like all-powerful giants, and more like ungainly dinosaurs.

In telecommunications, for instance, popular web-based messaging systems like Tencent’s WeChat are a major challenge to state-owned China Mobile. WeChat has more than 300 million users, sending voice and text messages over the web.

The U.S. experience suggests carriers can be big losers when the likes of WhatsApp takes hold. In the first quarter of 2013, China Mobile’s profits grew just 0.3% year on year; the company said new technologies are eating into the traditional communications business.

Something similar is going on in banking. In the past, China’s savers had little choice beyond bank deposit accounts that offered low returns. Now, the rapid growth of high-yield investments known as wealth-management products, or WMPs, means savers have options to move their money around.Assets under management in these products have grown from almost nothing a few years ago to about 7.1 trillion yuan ($1.2 trillion) at the end of 2012, denting deposit growth. And while the big four state banks control 49% of deposits, their share of funds in wealth-management products is only 38%, according to Bernstein Research. Also, because WMPs offer returns of about 4.2% a year—almost a full percentage point higher than a one-year time deposit—banks’ margins from WMPs are lower too.

The rise of online messaging and WMPs shows that even without government-led reforms, innovations in technology and competitive pressures are starting to redistribute the benefits of China’s growth. The result should be lower profits for the state sector and higher household income and consumption.

It isn’t all bad news for China’s state-owned firms. Rapid adoption of 3G, driven in part by the appeal of WeChat and similar applications, is helping telecom firms sell more data services. Also, regulators could force messaging services to pay a fee to the telecom companies. For the banks, wealth-management products are a new source of fee income.

Chinese state-owned enterprises that have generated huge profits under the existing system might be keen to stymie reform. But innovative private firms and demanding consumers aren’t willing to wait.

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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