Bottom line: Baidu’s new tie-up with a US-based stock broker reflects growing access to global stocks by Chinese investors, and could help to stem the recent privatization wave of overseas-listed Chinese companies.
In a move that has highly symbolic overtones, online search giant Baidu (Nasdaq: BIDU) has just formed a new alliance with a US company that will finally make its own New York-listed stock available to investors in its home China market. That deal will see US stock trading startup Robinhood offer its services over Baidu’s own brokerage platform, in a tie-up that reflects the growing access that Chinese investors are gaining to overseas stock markets.
This particular tie-up is part of a nascent but growing wave of investment in the cross-border brokerage space, aiming to capitalize on Chinese traders who want to diversify their portfolios beyond their own volatile domestic stock markets. Baidu’s move puts it in competition with smartphone maker Xiaomi, which entered the space last year through its own investment in start-up Tiger Brokers that operates an app allowing Chinese investors to buy US stocks.
According to their new joint announcement, Robinhood will supply the necessary links and other technology and information that allow users of Baidu’s stock-trading services to purchase US shares. (company announcement; English article; Chinese article) The pair say the service will be free of fees, so it’s a bit unclear how the companies will make money from the partnership.
I suspect they will do so through advertising, or perhaps by promoting stocks of companies that pay a fee. Such practices are quite common in China and often not disclosed, though they seem to be tolerated by consumers who like receiving this kind of service for free.
The move makes Baidu the first of China’s big 3 Internet companies to announce a major initiative in the overseas stock trading space, though it’s about a year behind Xiaomi. (previous post) All of China’s major Internet companies have been piling into financial services over the last few years, as Beijing tries to invigorate a sector dominated by state-run companies by opening it to private investment. Baidu has typically been a laggard in the space, even as rivals Alibaba (NYSE: BABA) and Tencent (HKEx: 700) have aggressively developed their domestic electronic payments and investment services.
Baidu’s new tie-up is also highly symbolic, since it will make the company’s own US-traded shares more accessible to Chinese investors. Many Chinese companies that have listed in the US and Hong Kong often complain that their shares are undervalued by local investors who are unfamiliar with their names and business models. Those complaints have led a growing number of those companies to launch privatization bids over the last year and a half, with an eye to re-listing in China.
It’s probably a bit too early to say if Baidu’s new tie-up will help to reverse the privatization trend, since the cross-border brokerage industry is still in quite an early stage. One estimate says there are currently about 500,000 US stock traders in China, though the number is growing quickly.
Chinese investors also gained access to the nearby Hong Kong market in 2014 with the launch of a program that allows Hong Kong and Shanghai traders to buy shares in each other’s markets. A similar program connecting Hong Kong and China’s other major stock market in Shenzhen is expected to launch later this year.
It’s obviously still quite early in the cross-border stock trading game, meaning that Baidu and Robinhood are unlikely to see any major gains from this new alliance for at least the next 2 years. But given the Chinese fondness for stock trading and the volatility of China’s own domestic stock markets, I would expect these services to rapidly gain traction in the next few years if local regulators don’t interfere. That could benefit not only brokers like Robinhood and Tiger, but could also revive interest in New York listings by Chinese companies as more China investors gain access to US stocks.
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