Mastercard’s outgoing CEO Ajay Banga has been a guest of US President Donald Trump on various occasions. The most recent was the signing ceremony of the phase-one trade deal between the US and China at the White House in January (see WiC479). Banga had a good reason to be there: Mastercard was a symbolic beneficiary of an agreement that Trump described as “righting the wrongs of the past”.
Less than a month after the deal was inked, the People’s Bank of China (PBoC) gave permission for Mastercard to establish a bank card clearing business in China under a local joint venture, ending a three-decade wait for the New York firm.
Since opening its first representative office in mainland China in the late 1980s, Mastercard had only been allowed to partner with Chinese card issuers to offer co-branded plastic that processed foreign-currency payments. The limitation effectively curtailed its market to Chinese travellers conducting cross-border transactions.
For years the Chinese have been criticised for taking baby steps towards the opening up of their financial services market, especially after a ruling by the World Trade Organisation in 2012 that faulted the country for discriminating against international payments service providers.
Despite its pledge to create a level playing field for all parties in 2014, the PBoC only drew up actionable guidelines three years later. And even then, applications from Visa and Mastercard to process renminbi transactions weren’t acknowledged until more recently, according to the Financial Times.
Mastercard rolled out its first card in China in 1987, roughly 15 years before state-controlled counterpart UnionPay came into being. China’s payment market has grown substantially, reaching Rmb191 trillion ($27 trillion) as of 2018. But new products have also emerged, going mainstream to the point of marginalising much of the older payments infrastructure. Over 90% of the population in China’s largest cities use mobile apps Alipay and WeChat Pay as their primary payment method. Cash comes second, and plastic a distant third, estimates the Brookings Institution, a Washington-based think tank.
That begs the question of whether Beijing’s go-ahead will bring meaningful growth for Mastercard. Even UnionPay, the dominant player, is struggling to maintain its relevance amid the widespread adoption of mobile payment services. Merchants around the country have been lured by generous incentives by both Ant Financial and Tencent, as well as aggressive promotion of their digital wallets through so-called “New Retail” (see WiC396).
UnionPay is playing catch-up with a mobile payment strategy of its own. In 2017 it launched Cloud QuickPass, a mobile payment app, together with more than 30 of China’s commercial banks, in a bid to fire back at the tech giants. It introduced a facial recognition feature similar to Alipay’s DragonFly and WeChat Pay’s Frog Pro last year.
But perhaps more significantly, it is also exploring how to integrate its QR code system into WeChat Pay so that customers can transfer cash or spend money without having to switch between payment apps. That pilot programme – being trialled in Ningbo, Hangzhou and Chengdu – was initiated following a directive by the PBoC last September that providers should seek to standardise QR codes for payments. Aside from being more convenient to users, the policy is expected to encourage competition and challenge the current duopoly in China’s online payments market.
The policy is also seen to help UnionPay deal with the increasing threat of Nets Union. On Singles’ Day, a Black Friday-like shopping festival, last year, Nets Union settled 87% of the transactions by volume, or 78% by gross merchandise value totalling Rmb1.48 trillion. Backed by the PBoC and dozens of payment institutions including Ant Financial and WeChat Pay, Nets Union was established in 2017 to channel transactions between third-party online payment platforms and banks with the objective of curbing financial risks and illegal practices.
Tapping Nets Union as its local partner, Mastercard’s ambition is perhaps less about card services than payments networks. In December PayPal became the first foreign payment platform to provide online payment services in China, for instance, by acquiring a 70% stake in GoPay, a former HNA Group subsidiary that helps merchants to accept payments on their websites when customers shop online.
The value proposition here differs from rival American Express, which won a licence in China in 2018 with local partner LianLian Group for a business that specialises in cross-border transactions online.
Another part of the financial liberalisation effort stemming from the Sino-US trade deal is the greenlight for US firms to apply for asset management licences, and to acquire non-performing loans directly from Chinese banks. Having invested $6.5 billion in China’s distressed debt market, Los Angeles-based Oaktree Capital became the first of the international distressed debt specialists to set up a wholly owned subsidiary in mainland China last month.
Critics seem split on the initiative, however. Bad debt and distressed assets – estimated at $1.5 trillion as of end of 2019 – looks like a massive opportunity for vulture investors (see WiC483). But the challenges for the new entrants in doing business in China are going to be pretty daunting too.
A case in point would be Dandong Port Group. The port operator has defaulted on nearly Rmb8 billion of local bonds since 2017. A group of local government officials was then appointed to run the bankruptcy proceedings. Their restructuring plan – which assigned the better-performing assets to a provincial state-run port operator and the less profitable businesses to another entity collectively-owned by creditors – was ruled “relatively fair” by the local court, despite loud and staunch opposition from creditors and shareholders.
These stakeholders were furious, claiming they had been deprived of the debtor’s financial information and blocked from the reorganisation process. The process reflects longstanding questions about creditors’ rights in China and whether they are protected by the judicial process.
Because of the opaque nature of much of China’s asset market, deal scouting and risk assessment can be costly for the distressed debt firms, according to market participants. “We think investors will have to invest in a local platform and build up staff across functions – from investment, research, accounting and legal – to succeed. Without a platform, one has to rely on third-party providers, and the cost is exorbitant,” SC Lowy, a Hong Kong-based manager of distressed assets told Nikkei Asian Review.
The Japanese magazine reckons that intermediary fees in China can be as high as 15% of the value of a transaction, compared with 3-5% in markets like India, Japan and South Korea.
“China is opening the deepest, darkest corner of its strained financial system to American financial institutions. It’s not clear why investors would want to go there, even with their eyes wide open,” added Anjani Trivedi, a Bloomberg columnist.
On the other hand, Oaktree’s timing on its new venture could turn out to be impressive. In the wake of the coronavirus outbreak – and its dire impact on China’s economy – the volume of distressed assets looks certain to rise this year.
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