Written by By Jing Xiang, CNN Beijing, China Written by Xingli Wang, CNN Beijing, China
Credit Suisse — China has borrowed heavily from foreign investors to fuel its economy. Now, as Beijing is wresting market share from U.S. tech companies, some are investing in the wrong countries.
In 2015, China pledged to no longer be a foreign direct investor (FDI) destination for the wealthy because foreigners were unhappy with the treatment they received there. Many financial firms invested money in China, on the way to building and operating hubs for financial technology (fintech).
Now, companies like Baidu and Evergrande are bracing for a tough macro environment as China steps up a trade war with the U.S.
Evergrande is expected to default on a $2.8 billion debt in October, after it asked to cancel a coupon payment in April. The company originally planned to place that debt with firms in the US. The company claims this decision was made because of new Chinese regulation that restricts Chinese companies from buying overseas assets.
However, this November, Chinese regulators did issue a regulation that restricted Chinese investors from holding foreign debt . According to investment manager Cheng Wei, this creates a new obstacle for a growing number of Chinese companies with debt.
“Many Chinese companies who are looking to utilize debt instruments overseas to capitalize on the growth of fintech will get hurt,” said Cheng.
Credit Suisse says FDI in Chinese fintech companies has largely mirrored the pace of China’s development in the last few years.
In the last four years, fintech companies from the U.S. have received three-quarters of their funding from outside the U.S., whereas Chinese companies received one-quarter of their funding from overseas. This is similar to the trend observed during the period between 1994 and 1999.
The U.S. FDI share has been growing and jumped from $2.8 billion in 2013 to $4.5 billion in 2018. The same happened to fintech companies’ financing from outside China. From 2013 to 2018, Chinese companies received three-quarters of the funding from overseas. However, at the same time, Chinese companies actually dropped from over 80% of the funding from overseas.
Credit Suisse says that China’s foreign debt will likely get more concentrated in sectors like banking, securities and finance.
Chinese authorities reportedly reviewed business plans from several fintech companies to make sure that they don’t break new laws.
“Business plans of Chinese fintech companies, in the event of a default, should be prepared to report their assets, financing and sales positions,” says Cheng Wei.
Credit Suisse says Chinese regulators’ crackdown of foreign debt will likely be temporary and that foreign investors should still look to invest in sectors that benefit from China’s development, like technology, financial services and life sciences.
“While investors might feel less prepared after the credit freeze, we believe that in the long run this will only fuel more interest in China,” says Goldman Sachs’ head of U.S. equity capital markets, Michael Sheldon.
FWD: In China, now is the time to invest in fintech https://t.co/tlnsAX4OPK — Michael S. Sheldon (@mrsjudy_s) August 11, 2018
Johnathan Zwartz , CEO of fin.tech firm Gogolak, also believes that the current crackdown on the dollar’s value will help new digital payments companies grow by helping others get off the ground.
“If you look at the energy that went into introducing the payment system, then you could argue that, during the pilot, all these companies … have had enough time and capital to mature,” said Zwartz.
But, despite this bullishness, Evergrande’s future remains unclear. According to Credit Suisse, credit default swaps — whose pricing information is based on changes in bond prices — suggest Evergrande might default on its debt in the next 12 months.
Credit Suisse and Baidu did not respond to requests for comment. Evergrande also did not respond to requests for comment.