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China Merges Wal-Mart With Goldman Sachs in Alibaba
Yesterday, the China Banking Regulatory Commission approved a pilot of five privately owned banks – a move designed to introduce competition and private capital into the state-dominated banking sector while providing better financial services for small and medium sized enterprises (SMEs). In doing so, it may have just created the single most powerful company in the world.
Among the ten or so firms approved to set up banks (each bank must have two or more founding companies) was Alibaba, China’s largest e-commerce company. To give you a sense of Alibaba’s size, sales on its two main platforms, Taobao and Tmall, topped 35 billion yuan ($5.75 billion) on 11 November 2013. Alibaba’s sales on 11-11 (Singles Day) were nearly four times as large as the $1.46 billion worth of sales on Cyber Monday, the Monday after Thanksgiving.
How does it compare to US online retailers such as Amazon.com AMZN +0.53% and eBay? Alibaba’s 2012 sales reached $170 billion, larger than the sales of Amazon ($95 billion) and eBay ($75 billion) combined. This leaves only Wal-Mart Stores WMT -1.09%, with sales of $476 billion in 2014, in its path to global dominance.
With Alibaba’s entrance into banking, we won’t have to wait long. In addition to its e-commerce platforms, Alibaba has a number of other businesses, with the most important ones being those under its affiliated Small and Microfinancial Services Group. This includes its third party online payment arm similar to PayPal, Alipay, and its shareholdings in the micro-finance unit, Zhongan Insurance, and Tianhong Asset Management Co, of which Alibaba owns 51%.
Recently, Alibaba has garnered headlines owing to its online fund platform Yu’E Bao. Yu’E Bao is linked to a money-market fund managed by Tianhong Asset Management, and Alibaba allows individuals and corporates to invest funds in their Alipay account in Yu’E Bao with no minimum requirement for investment size or holding duration. With yields that have been in excess of 6%, demand has been enormous.
Recent reports put Yu’E Bao’s assets at over 500 billion yuan ($81.45 billion), an astonishing number since it has only been operating for about eight months. The $81.45 billion puts it ahead of Fidelity Investments as the 7th largest fund house in the world. At the same time, this 500bn yuan is equivalent to 16.8% of new household and corporate deposits from July 2013 through Feb 2014. Clearly it has an influence.
Imagine what may happen now that Alibaba has a banking unit, as well. Alibaba should have two types of willing borrowers. First, it will provide consumer financing to purchasers on its e-commerce platforms, boosting sales (bring on Wal-Mart!). Second, it can offer loans to companies/SMEs that sell goods on the e-commerce platforms. Alibaba has an advantage over traditional banks since it can use its detailed records of companies’ cash flows through its e-commerce platforms to assess creditworthiness. This will help the companies grow and provide better products for sale on the platforms.
Not only will this help Alibaba expand, but it fits in with two large government priorities. Expanding consumer finance will boost consumption, thereby helping in China’s structural adjustment away from an investment-led economy to a consumption-led one. Second, it can begin to meet the credit needs of smaller companies that cannot access credit from larger state-owned banks that have a preference for lending to larger state-owned companies (surprise, surprise).
Of course, these private banks will have restrictions on their business initially that will prevent complex financial transactions and possibly limit their growth. But even if Alibaba can only take deposits and make loans, it can still be dangerous. It is easy to imagine many of the smaller companies that sell merchandise on the e-commerce platforms being willing to shift deposits from large banks to Alibaba’s bank in exchange for the promise of getting loans. These smaller companies are currently shunned by large banks and must turn to more expensive financing in the shadow banking world. If Alibaba offers them loans at rates between what state-owned banks and shadow banks offer, they will clearly come to Alibaba.
If the bank is eventually allowed to conduct more complex transactions (it is expected that the private banks will not be allowed to participate in the interbank bond market initially), things could get very interesting. Can you imagine what would happen if Alibaba could securitize its loans and sell those products to investors in Yu’E Bao? You must be thinking of Goldman Sachs Group GS +1.67%, right?
Of course, all of these developments are not without risk. But as the company is supporting government-stated priorities of boosting consumption, lending to SMEs and forcing competition into the banking sector, it won’t be long before their business scope is expanded and the company becomes the world leader in just about everything.
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