The New Normal
Arbor portfolio company, Lufax, rang the opening bell at the NYSE when the company went public on Oct 30. While a lone staff member of the NYSE stood at the podium in NY due to pandemic induced safety concerns, at least 15 people, without masks, social distancing or fear, gathered to celebrate halfway around the world in Shanghai.
While most of the western world remain consumed by the coronavirus pandemic and faltering economies, China recorded 4.9% GDP growth in the third quarter this year. According to the IMF, it will be the only economy to experience positive growth this year. On October 29th, China’s national leadership quietly wrapped up its Fifth Plenum, where the 14th Five Year Plan was reviewed. The message was clear — focus on building a robust domestic market that will be the catalyst for continued growth.
The ongoing trade dispute with the US, as well as increased restriction on China’s ability to source key technologies from western countries, has put pressure on leading Chinese companies and renewed China’s desire for indigenous innovation and to become self-sufficient, especially in technology. The intensifying battle for tech supremacy is feeding an investment boom across multiple sectors, including semiconductor, IoT, AI and healthcare innovation.
Within financial services, FinTechs are called upon to build the infrastructure needed to drive domestic spending and provide greater access to credit for consumers and the SME segment, which now employ nearly 80% of the workforce. On July 23rd, China also fully opened up its financial sector to foreign investors by lifting foreign ownership restrictions across securities, fund management, futures, and insurance companies. There is a clear desire to accelerate capital markets reforms to allocate capital away from real estate and to lure high profile Chinese companies back to the home market. While Ant Financial’s recently suspended IPO may highlight pitfalls for China’s disruptive innovators, it would be a mistake to see this as anything more than a temporary setback for the FinTech sector.
We are entering a new world norm characterized by the splintering of global value chains. Globalization will likely shift from being US demand led to a multipolar paradigm where greater regional integrations thrive. China expects to be the key demand engine for the Asia region. In the first half of 2020, we saw the ASEAN block, comprised of 10 Southeast Asian countries, overtake the EU and North America as China’s largest trading partner, thanks to the expanded protocol of the China-ASEAN Free Trade Area that took effect in late 2019 and continued success in managing the pandemic in much of the region. ASEAN now accounts for nearly 15% China’s total foreign trade volume.
Due to Asia’s early exposure to COVID-19, VC investment in the region was hard hit in Q1’20 but has since recovered amid cautious optimism, led by China. Funding to startups in Asia increases 74% in Q3’20 vs. Q2’20, surpassing the 29% increase in both Europe and North America.[1] While US China bilateral investments will continue to be under pressure due to systematic concerns, we expect China to continue to expand its sphere of influence in Southeast Asia, continuing what we witnessed in 2019 when Chinese VC investments in the region increased more than fourfold.
Times of uncertainty can be unnerving, but they also offer new opportunities. Just as we witnessed COVID drastically accelerated digital adoption across all aspects of life, we will see innovation flourish in different corners of the world in response to a new world paradigm. As Darwin famously said, adaptability is the key to survival, above strength and intellect. We are excited to partner with entrepreneurs, wherever they may be, who are seeking to disrupt the status quo.
[1] PwC/CBInsights MoneyTree Report Q32020
By Wei Hopeman, Cofounder and Managing Partner, Arbor Ventures
