• China’s largest internet firm to buy 5% of China’s Yonghui
  • The acquisition boosts Tencent’s market share in payments

Tencent Holdings Ltd. will buy a stake in Chinese supermarket chain Yonghui Superstores Co. for about 4.22 billion yuan ($638 million), setting up a clash with arch-rival Alibaba Group Holding Ltd. in physical retail.

China’s largest internet corporation is acquiring about 5 percent of Yonghui from existing shareholders at 8.81 yuan apiece, Yonghui said in an exchange filing Friday, a 9.9 percent discount to its price before trading was halted on Dec. 8. The investment — a rare foray into traditional retail for a company known for games and messaging service WeChat — may be looking to drive adoption of its digital payments service in stores.

The deal follows Alibaba’s $2.9 billion November purchase of a stake in grocery retailer Sun Art Retail Group Ltd., which operates about 400 hypermarkets under the Auchan and RT-Mart banners. The e-commerce giant is betting it can use technology to overhaul a $4 trillion domestic brick-and-mortar retail industry and drive its next phase of growth. Jack Ma’s company has already spent billions buying into grocers, shopping malls and…