China's experiment with a digital currency, a move Deutsche Bank said could usurp some cryptocurrencies over time, is giving life to one small corner of the nation's sluggish stock market: information technology service providers.
A gauge tracking 52 digital currency-related stocks surged as much as 9 per cent in April to the highest since December, according to Eastmoney.com. Pacing the rally was Chutian Dragon, a security smart-card producer whose stock surged 144 per cent. Global Infotech, which provides application and software systems for banks, jumped 22 per cent.
The spark contrasted with broader market inertia, where the CSI 300 Index and the Hang Seng Index have drifted sideways over the past two months, while bitcoin and ether tumbled and rallied. Money managers at Invesco and UBS expect big banks to profit as the revolution in money transfer systems gathers speed.
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"Banks should be the key beneficiaries of the digital yuan because digital yuan has zero fees, which is more competitive than existing electronic payment platforms," said Chris Liu, a Hong Kong-based fund manager at Invesco. "Banks could grab market share from there."
Financial institutions are likely to target both e-wallets and merchant acquisition services which are currently dominated by third-party payment companies, benefiting IT service providers as new investments in e-wallets and other applications increase, Liu added.
China is leading major economies in developing a central bank digital currency, also known as the Digital Currency Electronic Payment or DCEP, after expanding its trial last month into more regions. Six of the nation's biggest lenders handled a pilot promotion in December.
"The Chinese DCEP represents perhaps the most interesting and powerful project at this point in time," analysts at Deutsche Bank Chief Investment Office said in a special report last month. With more than 1 billion people as potential users, it could gather critical mass and seize global leadership, they added.
"Since there have been continuous pilot tests on digital yuan in multiple cities in China, merchants found the user experience of digital yuan is similar to the existing payment platforms," said Liu, who manages China-A Investments for the US money manager with US$1.4 trillion of assets worldwide.
As early adopters of the digital currency, the six state-controlled banks stand to gain with first-mover advantage, according to Hu Yifan, the Hong Kong-based regional chief investment officer at UBS Global Wealth Management.
In the medium to long term, the whole digital and financial ecosystem in mainland China would see a positive impact from the launch of DCEP, driven by strong mobile payment penetration and potential new growth opportunities, she added.
"With the digital currency, to a certain extent, internet payments will become more popular as its application becomes broader," Hu said. "The pie will become larger, so this will benefit the whole internet payments system, including the e-commerce sector, as it will become more convenient for users."
Among the banks involved in the pilot DCEP programme, ICBC is likely to have potential returns of 53 per cent over the next 12 months, with a target price of 7.85 yuan among 33 analysts tracked by Bloomberg. Hong Kong-listed China Construction Bank has a 42 per cent upside at HK$8.71.
China has well-established electronic payment services that are dominated by Tencent Holdings' WeChat Pay and Alipay of Alibaba Group Holding, the owner of the South China Morning Post. China has said that a centrally-controlled digital currency would be a backup if private payment systems hit financial or technical problems.
"CBDCs need to be evaluated in their own right and also in terms of how they could complement, or displace, increasingly widely used private-sector cryptocurrencies," Christian Nolting, Deutsche Bank Global CIO, said in the April report. "My belief is that governments and more digitally-aware populations may ultimately prefer to go with CBDC, at least for general use, at the possible expense of some cryptocurrencies."
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.
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