China’s Regulators Will Squeeze, Not Crush Fintech

CHINA’S TWIN CRACKDOWNS on shadow banking and fintech are aimed, in part, at protecting the country’s staid state-controlled banks and, in part, at reining in a sector of the economy that is growing too fast and too powerful for authorities liking.

Fintech platforms and online payments have attracted many depositors and borrowers dissatisfied with the low interest rates and limited access to credit for non-state borrowers within the state-controlled banking sector. This is draining liquidity from state-controlled banks.

It also deepens authorities’ concerns about the extent to which the tech giants are expanding their influence over every aspect of life and about the vast amounts of data they amass from providing services from online payments to shopping, chatting and ride-hailing.

The summoning of 13 tech companies by financial regulators last Thursday, including Tencent, which is the largest shareholder in the online bank WeBank (seen above), to inform them of a raft of new compliance requirements for their fintech businesses, signals that regulators are expanding their campaign to rein in the tech giants’ drive into the financial sector.

Yet it is only the latest example of official pushback. Previous measures include the cancellation of the planned public offering by Alibaba’s fintech spin-off, Ant Group, which was followed by antitrust actions that resulted in a ‘rectification plan‘ to correct unfair competition practices in its payment business, broke down its information monopoly and required it to apply to become a financial holding company. The newly summoned 13 are being given the same treatment.

Even before all that, authorities had instituted a de facto ban on peer-to-peer lending platforms. Indeed, the crackdown on shadow banking dates back to 2016 when concerns about the need to deleverage the economy started to take hold among policymakers.

Further regulation and investigations of fintech businesses will likely continue. However, demand for and supply of alternative finance is unlikely to disappear, and the state-controlled banks are unlikely to meet it any time soon. Their legacy modus operandi as policy agencies rather than independent financial services providers is a heavy one to cast off. Until they do, innovative fintech alternatives will find a way to emerge.

The catch-22 for authorities is that non-bank finance will remain crucial for the private sector, which, in turn, supports much of China’s economic growth and jobs. Thus non-state borrowers are likely to continue to be allowed access to non-bank credit and the tech giants to provide it through their fintech platforms, but both sets will need to be sensitive to the fact that that will increasingly be on authorities’ terms, not theirs, and that those terms may change unexpectedly.

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