Why Are There A Lot Of Chinese Companies In The ARKF Financial Innovation ETF?

Looking back at the post on the national makeup of Ark funds we found that ARKF had the largest percent of holdings that were non-US companies. And of those foreign holdings, 7 were headquartered in China.

Asia has iterated on financial services quickly and the result has been a glut of novel and widely-used products. The largest of those is WeChat (developed by Tencent) which has a dedicated in-app payment system that is responsible for over 1 billion monthly users. Alipay (owned by Alibaba), the other giant in the space, counts 870 million monthly users and was the largest payment platform in the world when it overtook PayPal in 2013.

But why?

China is so large as a user base that this was almost always going to be the case. However, there are two contributing factors that guaranteed it would be domestic companies serving Chinese users instead of foreign ones.

First, the Chinese government has always blocked or severely hindered foreign software companies from operating in China to allow domestic companies to grow and flourish without the pressure to compete against mature companies. Without this it’s likely Google or PayPal would be one of the dominant players in Asian payments right now.

Second, is simply that China skipped the credit card era. When credit cards became commonplace in the western world 50 years ago China was an economic mess. Almost 90% of its population lived in deep poverty. Fast forward to 2010 and China has grown its middle class to the largest in the world and shrunk the poverty rate to 0.7%.

China's poverty rate fell from 88 percent in 1981 to 0.7 percent in 2015

By skipping the credit card era there was less friction getting to next generation payment mechanisms like mobile and peer-to-peer. This missing Chinese credit card era could end up as a classic study on how legacy infrastructure can inhibit new innovation from taking root quickly.