Dragon’s Quest: A look into Chinese Investments in ASEAN’s Fintech Industry

The world’s largest Fintech ecosystem is here to stay

In 2022, amidst the looming COVID-19 pandemic crisis which contributed to undesirable economic growth, China unveiled its Fintech Development Plan for 2022-2025. The Development Plan outlines 8 main tasks, with an emphasis on strengthening prudential regulation and governance of Fintech, which is not surprising against the backdrop of a harsh regulatory crackdown which has been ongoing for a  few years. Despite that, we would argue that China’s position as the world’s largest fintech ecosystem remains unassailable in the near future. For one, her Fintech sector is extremely competitive. An all-time favourite case study would be Alipay, now the world’s most widely used mobile payment platform, with the total number of users standing at 1.3 billion. Furthermore, Chinese Fintech firms have been actively seeking opportunities abroad to expand their reach. Globally, China is now the world’s leading Fintech investor since 2018. And their top investment destination? Southeast Asia. 

Southeast Asia: The darling of Chinese Fintech investments

There are several reasons why Chinese Fintech firms like to invest in Southeast Asia (SEA)’s Fintech Sector. Firstly, Chinese Fintech firms took a toll during China’s regulatory crackdown, which incentivised them to seek investments and partnerships abroad.Southeast Asia’s fast-growing Fintech sector. For example, back in 2020, the Chinese government halted Ant Financial’s record-breaking and long anticipated mega IPO, citing regulatory concerns. Since then, Ant Financial has been seeking opportunities in Southeast Asia and has been an active investor for the region’s Fintech startups. Secondly, China’s fintech sector is seeing stiff competition, particularly in the fields of digital payment and wealth management, which pushes companies to expand overseas, according to Zenon Kapro, the director of Kapronasia consultancy. With the aforementioned in mind, it is also  natural that Chinese companies are inclined to venture into Southeast Asia when choosing their investment destinations. In 2013,In a bid to promote regional development and connectivity, China launched the Belt Road Initiative (BRI) of which ASEAN took up the greatest proportion of total BRI investments compared to other regions, suggesting strong ties between China and ASENA. In recent years, amid the COVID-19 pandemic and increased geopolitical tensions, China has been focusing increasingly on the friendlier ASEAN market and China is now ASEAN’s largest trading partner and leading investor. Apart from that, Southeast Asia’s demographics feed into the demand for Fintech products. In general, Southeast Asia’s population, which is still expanding, consists a significant portion of young and tech-savvy individuals. Logically speaking, since much of these Fintech-related services are deployed on mobile phones, Southeast Asia is definitely one of the best places for Fintech firms to thrive.  This can be reflected through investors’ growing appetite for SEA’s Fintech firms – in just the first nine months of 2022, SEA’s Fintech firms received a combined funding $4.3 billion, higher  than the combined sum from 2018 to 2020.

Within Southeast Asia, Singapore and Indonesia seem to be leading the way for the region’s incoming investments as they account for two-thirds of Southeast Asia’s Fintech deals. In this article, we will be examining the presence of Chinese investments in Southeast Asia’s Fintech sector with a particular emphasis on the Indonesia market.

Before we deep dive into the specific reasons why Indoensia’s Fintech sector is attractive to Chinese investors, it is important to recognise that Chinese investors favour Indonesia for investments across many sectors. For many years, China has strong bilateral ties with Indonesia which can be exemplified by the fact that China is Indonesia’s largest trading partner and second largest foreign investor. Specifically, Chinese investors’ great interest towards Indonesia’s nickel smelter industry for strategic reasons has also been widely reported. Owing to the $14 billion poured into Indonesia’s nickel sector for the past 10 years by Chinese investors, Indonesia has now become the world’s largest producer of nickel and nickel-related products. Being a member of the Association of Southeast Asian Nations (ASEAN), Indonesia has also recently signed the ASEAN Comprehensive Investment Agreement (ACIA), which further opens up the Indonesian market to foreign investments.

Indonesia: Southeast Asia’s Booming Fintech Market

Indonesia is one of the most populous countries in Southeast Asia, with the fourth largest population in the world. Indonesia is also one of the fastest-growing economies in the region, and its population is characterised by a high mobile internet penetration rate and a growing middle class with greater disposable income to adopt Fintech products. Additionally, Indonesia has a strong and vibrant Fintech sector, with the world’s third largest unbanked and underbanked population, constituting a growing demand for Fintech services.With the above in mind, Indonesia and China share many similarities, which means that it will be easier for Chinese investors and firms to serve the market using their existing knowledge and expertise.

Promising Fintech Sectors in Indonesia

Funding wise, Indonesia has received a significant amount of fintech investment compared to other SEA countries and these investments cover almost every fintech sector. However, with respect to Chinese investments, Peer-to-Peer (P2P) Lending and Payments are more popular among Chinese Fintech firms. Driven by regulatory crackdown in their home country, Chinese P2P firms flocked to Indonesia as they seek to expand. In short, P2P Lending platforms act as a central marketplace that matches borrowers’ borrowing needs to the financing capital provided by lenders, bypassing traditional financial institution. The concept of P2P Lending first emerged in China when PPDAI was introduced and since then, unregulated P2P lenders proliferated for a long period of time. At its peak, China had more than 6000 P2P lenders. Due to the lax regulations, the industry struggled with fraud. For example, in 2016, the major P2P lender Ezubao turned out to be a Ponzi scheme, leaving behind frustrated users who lost money. In a bid to protect users’ interests, in 2019, the Chinese authority demanded P2P lenders to exit the industry and become small loan providers within 2 years on the condition that they are able to meet a capital requirement of at least 50 million yuan (approx SGD $9.75M). Unable to meet the stringent requirement, many P2P lenders shut down their operations in China and there was an outflow of them to Indonesia. It is known that they constituted more than half of Indonesia’s P2P lenders. While Chinese P2P firms have helped to drive financial inclusion, their entry also resulted in a rise of illegal and unethical businesses when they first entered the Indonesian market. For example, certain P2P lenders have unlawful and aggressive debt collection processes, such as calling the friends and families of borrowers. Having observed the downfall of China’s P2P lending industry due to lax regulations at the initial development phases of the industry, Indonesia’s financial services authorities Otoritas Jasa Keuangan (OJK) decided to take active steps to regulate the industry early. In 2022, in a bid to protect users’ interests, OJK increased the minimum capital requirement for lenders from 1 billion rupiah to 25 billion rupiah. In addition, P2P lenders need to maintain at least 12.5 billion rupiah of equity throughout their operations.

Despite stricter regulations, Indonesia’s P2P lending industry still sees rapid growth in terms of loan disbursements. In just 5 years, their local P2P loan disbursement increased from 3 trillion rupiah (approx. SGD $262.5M) in 2015 to 155 trillion rupiah (approx. SGD $13.6B) in 2020. One notable Indonesia Fintech firm would be Akulaku, which offers a wide range of lending and payments-related services. It was founded by Chinese entrepreneur William Li. As Chinese entrepreneurs invest and start their own fintech firms in Indonesia, not only do they bring along their skills and expertise, but they also leverage their own network of investors to help boost the funding capabilities of their own startups. To illustrate this, let us take a look at Akulaku’s funding rounds to date.