Technology Stocks : Investing in Exponential Growth

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From: Paul H. Christiansen2/13/2018 9:11:11 AM
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Where China Can and Can't Innovate

China's biggest tech companies are emblems of national pride. When the government decides upon a priority, Tencent Holdings Ltd., Alibaba Group Holding Ltd. and Baidu Inc. are often asked to help devise the technology to achieve it. The companies are generally spared from official criticism, let alone interference with their commercial operations.

Those privileges aren’t absolute, however, as Tencent -- the company behind the WeChat messaging app -- recently learned. Late last month, China’s central bank shut down Tencent’s fledgling credit-scoring agency after only a day. The decision was particularly surprising, given that the government had authorized the project in 2015 and had actively encouraged the company to proceed. At the same time, it’s a good indication of what kinds of innovations will and won’t be allowed to thrive in China's private sector.

The need for a system like Tencent’s hasn’t diminished. It’s long been easy for Chinese state-owned companies to borrow money from banks. Consumers and small entrepreneurs without connections, and even many private companies, face far greater hurdles. As a result, they've opted for informal and shadow banking.

To begin remedying this state of affairs, in 2014 the government proposed setting up a " social-credit system" that could flesh out whatever financial records existed with additional "social" data -- ranging from school to criminal records. Companies could in theory process that mass of data to devise a credit score. "In the future, perhaps there will be a ranking system for morality," Tencent Chairman Pony Ma told an audience in 2013. "If your friends have high morality, then your credit should be good, too. Otherwise, they naturally wouldn’t become friends with you." In other words, if you're a good citizen, you're probably a good risk for a loan.

Thanks to China's mass adoption of mobile phones, online shopping and social media -- and the development of artificial intelligence to process all the data thereby generated – such systems are more viable than ever. In 2015, the government authorized eight companies to launch social-credit pilot programs while it prepared its own national system for launch in 2020. Tencent was one of the companies selected and -- along with Alibaba – it was widely expected to become a leader in the industry.

Read More - Bloomberg Business Week
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