Tencent’s CICC Tie-up Shows Fintechs’ Next Steps

Euromoney, September 2017

Chinese fintechs have been redrawing the map of financial services for a while now, and Tencent has just added the latest amendment.

The mainland internet company, owner of the WeChat messaging app that has become ubiquitous in Chinese life, has bought a 5% stake in CICC, one of the country’s most storied brokerages.

These are two big names. Tencent might not have quite the global brand recognition of Alibaba and its mobile payments arm Ant/Alipay, but domestically it is exceptionally powerful.

WeChat has 938 million active monthly users, roughly equivalent to three USs. It is used constantly by people in China, not just to communicate but to pay for things and transfer money, accounting for 40% of mobile payments in China and with links to a million offline merchants.

CICC started life as a joint venture between Morgan Stanley and China Construction Bank in 1995, the first of many international securities joint ventures – although Morgan Stanley has long since sold out.

Today it is among the domestic leaders in securities, wealth management and asset management. Although pushed down underwriting league tables by domestic powerhouses such as China Securities, CITIC Securities and Guotai Junan Securities, it remains a top-10 player domestically on both debt and equity capital markets underwriting.

So what will they be doing together? Tencent hasn’t yet said anything about the deal – a $370 million investment in newly issued H-shares – but CICC disclosed it in an announcement to Hong Kong’s stock exchange.

The announcement calls it a “strategic cooperation relationship” based on the “remarkable mutual complementation” between the two parties.

“Remarkable mutual complementation” is the sort of oblique statement you just have to put up with when reading Chinese stock exchange filings, but in practice it appears to refer to the expansion of CICC’s wealth management businesses through the use of Tencent’s internet and technology reach and expertise.

This would make a lot of sense, because competitor Ant Financial has been pushing its own wealth management agenda hard, and in June opened its WM app to other financial institutions.

Plus, Ant created the world’s largest money market fund Yu’e Bao, just as a method of doing something with customers’ surplus cash.

It also makes sense because investment banking isn’t likely to be on the radar of Tencent – or Ant – so wealth and asset management are the only areas where the two businesses could be seen as complementary.

“In financial product distribution, Ant is the most aggressive,” says Elinor Leung, head of Asia telecom and internet research at CLSA. “It has 2,600 wealth management products on its platform from insurance to peer-to-peer loan receivables.

“Tencent is a lot more conservative. It has about 50 very selective products on its platform and works only with the big asset management companies with SOE backgrounds.”

The CICC tie-up fits with that approach.

CICC’s shareholders liked the deal more than Tencent’s did, suggesting which party has the most to gain from the cooperation: CICC’s shares went up 19% at the Hong Kong opening before settling about 12% up, whereas Tencent didn’t budge.

CICC, while still successful, has been somewhat overshadowed by the growth of names such as Citic Securities, and tying up with one of the world’s fastest-growing fintechs might give it renewed momentum.

The move into wealth management of Chinese fintechs should be watched closely by the industry. Their steady expansion as a payments channel for overseas Chinese tourists, or building e-wallets in partnership with local emerging-market peers, is one thing. Taking on the established hegemony of wealth management distribution? That’s quite another.

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