It may not be fashionable to say, but China's old guard is coming back. In a country that's home to some of the world's savviest online shoppers, conventional companies are starting to win again in areas such as banking, insurance and even bricks-and-mortar retailing.
That's not to say the new economy is dead: After all, it's still the source of much of China's growth.
But government rules that are tamping down on areas from peer-to-peer lending to wealth-management products are shifting the balance back toward established companies, as are tie-ups between traditional retailers and internet competitors.
Take the crackdown on P2P lending. The industry had emerged as a big provider of mortgage loans, helping buoy real estate markets in cities such as Shenzhen. After a string of scandals including one in which investors were bilked of almost $8 billion, China acted late last month to restrict the business. Individual borrowing on P2P sites now can't exceed 1 million yuan ($150,000), or 200,000 yuan from any one site.
The P2P sector's loss is banks' gain. First-half earnings released by China's biggest lenders showed a jump in new mortgage loans, at the expense of riskier corporate advances. Agricultural Bank of China, the third largest by assets, posted a 16.1 percent increase in mortgages compared with the second half of last year. The loans are generally seen as safer than other types of debt because they are secured by property and buffered by minimum down payment requirements.
Old-guard insurers should also get a fillip as China clamps down on a type of higher-risk product that's driven growth among newer competitors such as Anbang Insurance Group, which has become one of the industry's biggest companies in the space of a few years.
On Tuesday, the China Insurance Regulatory Commission issued several rules to restrain sales of high-yield, short-duration wealth management products dressed up as universal life policies, according to a Sanford Bernstein note dated Sept. 8. They include mandating that guaranteed sums be a minimum of 120 percent to 160 percent of premiums, from the current 102 percent, and capping high-cash-value products at 50 percent of premiums by 2019 and 30 percent by 2021. Anbang has almost 80 percent of its policies in the form of these quasi-WMP products, while conventional insurers such as China Life get the same percentage from traditional policies.
The CIRC initiative should help China's big publicly traded insurers, while the property market may take a hit given the flow of proceeds from these WMP-type policies into the sector, analysts at Bernstein note.
Even bricks-and-mortar retailers are making a comeback. Traditional shops in China have lost huge amounts of business to online competitors such as Alibaba and JD.com. Consumer electronics retailers have been the worst hit, with 39 percent of sales moving online by last year from 28 percent in 2013.
Yet after five years of pain, the pendulum is finally starting to swing back, according to HSBC. Electronics chains such as Suning, in which Alibaba bought a stake in August last year, and Gome are gaining an edge in e-commerce, while the price advantage held by pure online players is shrinking as their shareholders push for profitability.
Scale is proving an advantage for the two companies, which each has more than 1,500 stores across China and can use that heft to procure products more cheaply, HSBC says. They may still be losing money in their core businesses, but things are turning around. JD.com and Alibaba's Taobao and Tmall, meanwhile, have seen growth in gross merchandise value slip in recent quarters.
There are signs that investors are noticing the old-guard revival. China Life shares have risen 13 percent in Hong Kong in the past month and Ping An Insurance has jumped 15 percent. The biggest four banks have all gained more than 10 percent and Gome has added 18 percent. All have comfortably outpaced the Hang Seng Index's 6.3 percent advance. Only Suning has bucked the trend, sinking less than 1 percent in Shenzhen.
China's new economy is hardly about to go into reverse. The country's e-retail market reached $630 billion last year, almost double the $343 billion value for the U.S., according to HSBC estimates. Still, the recent revival is a reminder that being an established player has its advantages -- especially in an economy where the state wields such influence and is often a major shareholder itself.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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