Tencent Dips Toe In High Finance

Tencent to roll out investment product

Media are reporting that Internet giant Tencent (HKEx: 700) is following close behind rival Alibaba with plans to launch an investment product that is quite unrelated to any of its core online businesses. The move by China’s biggest publicly listed Internet firm comes as its market value reaches the psychologically important $100 billion mark, making it more than twice as big as China’s second largest telco, China Unicom (HKEx: 762), and more than 10 times larger than leading PC maker Lenovo (HKEx: 992). Its massive size and financial clout have emboldened the company to move outside its core areas into other businesses, some dominated by major state-run firms.

After years of intense competition in China’s fragmented Internet space, Tencent and Alibaba have both suddenly broken out as the country’s top 2 players, each with market values of about $100 billion. Both have used their growing clout to move into a wide range of different areas. Alibaba has been quite aggressive about growth through acquisitions, making several major purchases this year as it moves towards a multibillion-dollar IPO.

Tencent’s has chosen to grow more organically by developing new businesses on its own or in partnership with other firms. That appears to be the case again, with word that the company is set to launch a new service that allows users of its Tenpay e-payments service to invest their idle funds into other financial products. (English article) That plan looks remarkably similar to Alibaba’s Yu E Bao service launched earlier this year, which allows for similar investments from accounts on Alipay, Alibaba’s own electronic payments service. (previous post)

According to the reports, which cite unnamed industry insiders, Tencent will partner with 4 fund management companies to offer its new product, which will be released this month. Presumably investors will be given an array of investment choices, ranging from stock and bond funds to more conservative money market funds.

Tencent had reportedly considered an even more aggressive investment product that would have let users directly invest their salaries into financial markets, but in the end opted for the more conservative product linked to idle funds in Tenpay accounts. When Alibaba first announced its E Yu Bao, I predicted there could be trouble ahead because many users wouldn’t realize they could lose money by investing through the service. (previous post) The same could be true for Tencent’s new service, and I expect we’ll see quite a few hiccups for both services in the year after their launch.

From a broader perspective, Alibaba’s Yu E Bao launch and now Tenpay’s similar service show these companies want to move into other areas now dominated by state-run firms, breathing some major new competition into those spaces. Tencent has already made a major play into the telecoms space through its popular WeChat mobile messaging service, raising the ire of state-run industry titan China Mobile (HKEx: 941; NYSE: CHL). (previous post) Alibaba has been a source of similar controversy, raising the ire of major state-run banks and other financial services companies through its own moves into that space.

As a relatively impartial observer, I personally find this move by the big Internet firms into these other areas refreshing. Too many of these spaces have been dominated for the last 3 decades by big state-run companies, which are often protected by government regulations that keep out most private sector players. I do think that Tencent and Alibaba need to move carefully, as both are going far outside their traditional businesses and risk problems due to lack of experience and attacks from the big state-run firms. But in the meantime, at least their moves should help to shake up some sectors like finance and telecoms, breaking the monopoly in those sectors held by stodgy state-run firms.

Bottom line: Tencent’s move into investment products reflects a growing assertiveness by the company to challenge big state-run firms in areas outside its core Internet business.

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