Financial Services Rush Heats Up With Unicom Entry

| About: China Unicom (CHU)

A recent rush into financial services by Chinese Internet firms took a new twist last week when China Unicom (HKEx: 762; NYSE:CHU), the nation's second biggest wireless carrier, announced it will move into the space with the establishment of a new joint venture. Unicom joins China's major Internet companies and a wide range of other firms in launching such joint ventures, with Alibaba, Tencent (OTCPK:TCTZF, HKEx: 700) and Baidu (Nasdaq: BIDU) all announcing similar tie-ups this year.

The sudden interest in such ventures is understandable, as it meets demand from consumers and businesses for new products to earn better returns on their money than choices in the current market. The flood of new initiatives is also in line with Beijing's recent campaign to open up the nation's financial sector to private companies, ending a decades-old monopoly by state-run firms.

But while this new flood into financial services will certainly offer consumers and businesses more investment options, Beijing needs to keep close watch on this fast developing area. Financial products are always complex -- even when they provide good returns in boom times, and could easily become the source of controversy if they promise more than they can deliver to unsophisticated investors.

Unicom's joint venture announcement last week marked a new chapter in the financial services saga, as the company became the first major mobile carrier to launch a joint venture dedicated to providing such services. Before its announcement, most firms announcing major new financial products and services this year had come from the private sector, most notably the Internet space.

The publicly-listed Unicom said it will provide 91 percent of the new joint venture's 3 billion yuan ($500 million) in registered capital, while its state-owned parent will provide the remaining 9 percent. It added the venture's scope could include a wide array of financial services, ranging from providing financial advice and other consulting services, to arranging loans and conducting insurance business.

Unicom's move comes just 5 months after e-commerce leader Alibaba kicked off the recent rush into financial services with the announcement of Yu'E Bao, a joint venture with fund manager Tianhong Asset Management. That service allows users of Alibaba's popular Alipay electronic payments service to invest idle funds in their accounts into money markets. Since its launch Yu'E Bao has experienced explosive growth and last month became China's biggest fund with more than 30 million subscribers and 100 billion yuan in funds under management.

Leading social networking services (SNS) company Tencent joined the bandwagon in September when it announced its own similar product that would allow users of its Tenpay electronic payments service to invest idle funds into other financial products. Like Alibaba, Tencent also teamed up with other fund management companies to offer the new product.

The most controversial case came a month later in October, when online search leader Baidu announced its own similar venture. But unlike Tencent and Alibaba, Baidu promised subscribers an attractive 8 percent return on their investment as part of the launch for its Baifubao product, a venture in partnership with China Asset Management Co. Many observers quickly came forward and said the 8 percent return rate was unrealistically high, leading to widespread criticism of the product for making promises it might be unable to keep. Baidu responded by playing down the advertised rate, which it quietly dropped from its marketing materials.

The Baidu case illustrates the kinds of dangers that such a rapid roll-out could pose to China's relatively underdeveloped financial services market. When it comes to investing, many Chinese often hold unrealistic expectations and fail to understand the risks of buying products that are tied to financial market performance.

As a result, many expect to get big returns and few are prepared to accept potential losses, especially when they put their money with trusted names like Alibaba, Tencent or Unicom. These new financial products are certainly a welcome addition to the market, providing consumers with more options than the existing field offered by state-run brokerages, asset managers and banks that now dominate the sector.

But Beijing needs to keep close watch on these new ventures and quickly step in to regulate them when they grow too quickly or make inflated claims. By doing so it can avoid any controversy in this sensitive area that involves large sums of money from both consumers and smaller private enterprises that are vital to China's economic growth.

Bottom line: Beijing regulators need to closely monitor the rapid rush by tech firms into the financial services space to avoid conflicts from consumers with unrealistic expectations.

Disclosure: No positions.