China hogs APAC fintech funds in first half amid global decline, investor caution: KPMG

China was one of the top destinations for fintech investments in Asia-Pacific (APAC) in the first half of the year, but it mirrored a global decline, as investors tread with caution amid high interest rates and geopolitical uncertainty, according to KPMG.

Fintech investment worldwide fell nearly 17 per cent to US$51.9 billion in the six months to June, compared with US$62.3 billion in the second half of 2023, according to the consultancy’s Pulse fintech report on Thursday. The number of deals fell 1.4 per cent to 2,255 from the previous six-month period.

The value of investments in China dropped by a similar 17 per cent to US$624 million from January to June, compared with US$754.6 million in the second half of 2023.

APAC, meanwhile, experienced its slowest half-year inflow in seven year, with fintech investment dropping nearly 20 per cent to US$3.7 billion in the first half of the year, from the previous six-month period. Fintech investments in the Asia-Pacific region in the second-half of 2017 reached US$1.96 billion.

“Investors are acting cautiously, particularly on the mergers and acquisitions front, given concerns about valuations and the profitability of potential targets,” said Karim Haji, global head of financial services at KPMG International. Investors are focused on improving the prospects of the companies they already own rather than buying anew, he added.

The cost of capital has remained elevated for at least the past couple of years as central banks use high interest rates to get a grip on runaway inflation. Investors are also treading carefully on tech investments in China, as the US weighs more restrictions and the US presidential election approaches in November.

Mainland China and Hong Kong accounted for five of the top 10 fintech deals in APAC in the first half.

The largest deal on the mainland during the period was a US$280.9 million investment in Yi’an Enterprise, a Shanghai-based capital markets solutions firm specialising in services for investment banks.

In Hong Kong, the largest investment was secured by HashKey Group, a blockchain and cryptocurrency service platform, which raised US$100 million, making it the seventh-largest deal in APAC.

“While deal volumes remain relatively low, we feel there is a positive change in sentiment around fintech” said Barnaby Robson, head of value creation at KPMG China,

He pointed to efforts by mainland authorities to better connect international payments providers into the Chinese payments ecosystem, noting that some companies had received payment licence approvals.

Despite some regulatory uncertainty in China, fintech remains resilient, according to KPMG. Cryptocurrency continues to be an important investment choice, as blockchain has been recognised as a strategic technological innovation in the Chinese government’s 14th five-year plan up to 2025, the consultancy said.

As part of its “five finance strategy”, the Chinese government is encouraging financial institutions to support start-ups in fintech, green finance, inclusive finance, pension finance and digital finance – potentially leading to further investments in the future, according to the report.

Artificial intelligence (AI) continues to grow as a crucial sector to fintech investment. This year, AI investment in China has shifted from traditional financial institutions to focus on operational improvements and efficiencies, the report said.

“A number of financial institutions in China have introduced AI-driven applications, such as digital customer service providers and AI robots to help answer questions,” said Andrew Huang, head of fintech at KPMG China.

“During the second half of this year, we will continue to see these kinds of activities grow, many with the help of fintechs, but it will likely take time before any applications really mature” Huang said.