Tag Archives: fintech

China’s New Tech Order

AFTER NEARLY TWO years of crackdowns on various tech industry sectors, a series of policy plans have emerged that collectively outline a path of re-organisation and gradual but not disruptive development into the middle of this decade.

They bring some cohesion to the loosely connected regulatory measures taken since late 2020. The steady implementation of a clear regulatory and policy framework will replace what has looked like abrupt and random regulatory interventions.

This will be a cornerstone of the recently issued five-year plans for national informatisation and the digital economy,

China’s goal is to streamline private tech businesses from fintech firms to app platforms and enmesh them with state-owned enterprises and investment vehicles to ensure greater policy control. There is a particular focus on data and aligning the tech sector with the ‘common prosperity’ and ‘dual circulation’ development agendas.

It will be a balancing act. Beijing needs to avoid squashing innovation as it pushes to develop an indigenous tech sector that can improve economic self-reliance and be internationally competitive.

Policymakers want to use digital technologies to enhance service capacity and quality across the economy and serve underserved populations, for example, by expanding social services to rural consumers or extending credit to small and medium-sized enterprises. Yet, they also want to ensure state control of the data generated by private businesses and that those businesses do not use oligopolistic power to exploit the troves of data they collect from consumers and citizens.

The plans align with the intent to redress ‘the disorderly expansion of capital’. As with the admonition to the real estate industry that housing is for living in, not speculation, the tech sector is being schooled that it has to fulfil the needs of the real economy.

In particular, that means contributing to national innovation to help transform legacy industries in manufacturing and agriculture and playing a more significant role in generating access to and delivery of government and public services.

That message is being strongly sent to fintech firms, in particular. The idea is that fintech should be incorporated into the existing banking system, not disrupt it.

Financial instability remains a worry. Authorities are increasingly concerned that fintech products for consumers risk adding a layer of unsustainable household debt on top of existing corporate debt. Concerns about threats to the financial system were one of the reasons that authorities banned cryptocurrencies last year.

For tech companies as a whole, Beijing is making it clear that it rejects the digital economy model of large, winner-takes-all platforms as seen in the West and embraces new business models that enmesh state and private actors.

The era of unregulated growth is over. Tech firms will now be expected, for which read required, to contribute to the Party’s other policy objectives — tackling financial risk, supporting social objectives and development goals, improving market regulation and data security — and their shareholders, patriotically, to bear the costs.


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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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Regulators Rule

WHEN WE SAID we thought that the initial public offering (IPO) of Jack Ma’s Ant Group might come to be seen as an inflexion point in global capital markets, we thought it would be because raising such a considerable sum –$35 billion — outside of the United States would be a milestone in the development of China’s capital markets. But the abrupt pulling of the IPO of the fintech affiliate of Ma’s Alibaba group just days ahead of its scheduled launch because of ‘unexpected changes in the regulatory environment’ lays down a marker of a different sort, the power of China’s regulators.

Authorities from the People’s Bank of China and three other top financial regulators summoned Ma on Monday to inform him they had belatedly detected shortcomings, reportedly in Ant’s lucrative micro-lending units that will require reapplications for national operating licences and capital increases and restructurings. These will be necessary to comply with new regulations that took effect on November 1 to rein in systemic risks posed by companies that straddle at least two financial business lines. Ant’s businesses range from payments to lending, asset management and insurance.

This was no quiet word to the wise, but a none-too-thinly-veiled reminder to a business — and its owner — that is a threat to China’s state-run lenders, and thus by extension to the administration of state capitalism, that political loyalty and effectiveness as a policy instrument is just as expected of private companies as state-owned enterprises. Whether further actions are taken against other parts of Ant’s business will indicate the severity of the warning.

Ma may now judge as injudicious his recent likening of the big, state-owned banks to pawn shops and criticism of the Basel Accords, which set out capital requirements for banks, as a club for geriatrics.

The latter was part of a provocative futurist speech delivered in front of many of the country’s top financial regulators. They hold to the old-fashioned view that risk management, not innovation and growth is the foundation of a sound financial system. Nor will they have cared for Ma’s argument that China has no systemic financial risk as it has no financial system, and thus no need for systemic risk management. Authorities believe with good reason that there is cause to be wary of financial instability.

Ma is not the first fintech entrepreneur to hold that regulators and legacy lenders are dinosaurs, out of touch with digital innovation and the financial systems of tomorrow. He will not be the last to learn that until tomorrow comes, it is the innovators who have to comply with the regulators, not the other way round.


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