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The New York trading powerhouse Jane Street has quietly invested in Micro Connect, a Hong Kong start-up that generates a wealth of unfiltered data on China’s economy using a new and complex form of financing.
Jane Street, which has become one of the most profitable trading firms on Wall Street, bought a minority stake as part of the Hong Kong group’s most recent funding round last year, three people with knowledge of the matter said. It invested between $15mn and $20mn, one added.
Micro Connect extends financing to small businesses such as noodle shops, karaoke bars and hair salons across mainland China and collects a proportion of their daily revenues in return. It has packaged those revenues into tradable financial securities.
That gives Micro Connect an insight into the country at a time when accurate data on its economy is becoming harder to find. Its founder Charles Li told the Financial Times last year that he could see signs of the real impact of China’s end to zero-Covid rules in 2022 because pharmacies’ daily sales rose.
Jane Street’s investment was among a series of venture capital deals that the quantitative trading firm struck after it racked up huge trading profits during the Covid-19 pandemic.
Since 2020, Jane Street has backed 31 start-ups, many of them in artificial intelligence and decentralised finance, according to PitchBook. They include AI company Anthropic, in which Jane Street bought shares from bankrupt cryptocurrency exchange FTX this year.
Through the previously undisclosed Micro Connect investment, Jane Street has used its growing firepower to gain exposure to China’s economy even as some other US-based investors have become more wary of doing so because of tensions between Washington and Beijing.
Most of the Jane Street venture capital investments listed on PitchBook are in the US and Europe, but they also include ShuKun, a China-based AI company that analyses medical imaging data. Jane Street declined to comment on the PitchBook data or on its Micro Connect investment.
Micro Connect, founded in 2021 by former Hong Kong stock exchange head Li and former Chinese provincial government official Gary Zhang, collects a percentage of stores’ revenues every day after extending funds to them. Since China is largely cashless, the revenues can be counted, split and handed over using electronic systems.
Micro Connect has turned the revenue streams into financial securities, which can be bundled together, sliced and diced and traded on an exchange in the special administrative region of Macau, the former Portuguese colony and gambling hub.
The model has been controversial. Supporters say it has opened up a new source of funding for small businesses while giving investors a new way to gain exposure to China’s economy.
But sceptics have made unflattering comparisons with peer-to-peer lending, which was outlawed in China in 2021 after a series of scandals. The complexity of the securitisation process and its resemblance to pre-2008 collateralised mortgage obligations has also generated concerns.
An added risk is that Beijing may take a dislike to the model if it shines an unfavourable light on the real economy.
Micro Connect declined to comment.
The start-up has previously considered selling its data to investors, a 2023 management presentation shows.
The funding round in which Jane Street invested raised $458mn and was announced in August last year. It valued Micro Connect at $1.7bn. Micro Connect said at the time that investors included long-only investment managers, private equity and venture capital groups, internet platforms and consumer retail groups, but it did not name them.
Jane Street made its name trading in complex and less liquid markets such as exchange traded funds in Chinese stocks and exotic derivatives. It is active in Hong Kong, where it has an office and is listed as a market maker by the Hong Kong stock exchange.
Jane Street was founded in 2000 by a handful of traders from the quantitative trading firm Susquehanna and a former IBM developer. For years, it remained relatively little known as it built a presence in exchange traded funds, then a niche market.
But in 2020, it racked up huge profits from trading through the pandemic, raising its public profile.
It also attracted attention as the place where Sam Bankman-Fried, the now-jailed founder of FTX, began his trading career.
