Tag Archives: People’s Central Bank of China

Ant Knuckles Down

Logos of Ant Group and Alipay

ANT GROUP HAS applied to become a financial holding company. That will put Jack Ma’s fintech group spun out of Alibaba under central bank oversight. Thus authorities tighten their grip a significant notch over the sprawling fintech sector.

The somewhat imposed decision on Ant will require it to restructure itself as a payments services company. That was what regulators told the company to do after forcing the pulling of Ant’s proposed blockbuster initial public offering (IPO) last November. However, the first go-round did not pass muster. The central bank and the three other top financial regulators hauled in Ant executives on Monday for further talks.

Following those, the People’s Bank of China announced the company will now adopt its new structure as part of a ‘comprehensive and feasible rectification plan’ following its coming under strict regulatory oversight last year.

Critically, Ant has agreed to decouple its Alipay mobile payments app from other financial services it offers, such as unsecured online lending via its Huabei virtual credit card and Jiebei consumer loans. The company says its focus will be on enabling micro-payments for consumers and small-and-medium-sized enterprises, which is how it started. As part of this, it will set up a personal credit reporting company and improve consumer data protection. A separate (regulated) Ant consumer finance company will run Huabei and Jiebei.

The company also says it will improve its consumer data protection, rectify monopolistic behaviour and shrink the assets under management of Yu’e Bao, its giant money-market mutual fund. These changes all toe the new party lines for reining in the internet giants and scaling back highly leveraged lending.

Ant also contritely says it will plan its growth ‘within the national strategic context’ and ‘contribute to the new development paradigm of domestic and international circulations’. This reinforces the view this Bystander expressed previously about the platform companies being marshalled into becoming a ‘strategic height’ of the economy and a competitive advantage for China internationally.

The freewheeling days for fintech are now over. Ant’s affiliate Alibaba’s record 18.2 billion yuan ($2.8 billion) antitrust fine was further warning that Ant and all the other fintech companies will have to behave like traditional financial institutions and do as their regulators tell them in line with national policy objectives.

Where this leaves Ant’s IPO is uncertain. The restructuring will make the group less valuable than the $34 billion it was initially hoping to raise. Alipay has more than one billion users in China and holds approaching three-fifths of the $17 trillion mobile payments market, well ahead of its closest rival Tencent’s WeChat Pay’s two-fifths. That dominant market share tied together a vast and detailed trove of consumer data collected across Alibaba and Ant.

Weakening the ability to use Alipay across all its services will reduce those market shares, which is also the intent of new draft measures announced in January to curb market concentration in online payments.

Update: The State Administration for Market Regulation has told 34 internet platform companies, including Tencent, ByteDance, Pinduoduo, Baidu and JD.com, to get any anti-competitive practices sorted out within the next month — confirmation, as if it was needed, that the crackdown on Ant Group and Alibaba is neither all about Jack Ma nor over.

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China Hikes Interest Rates Another Notch

As expected, China’s central bank has raised its benchmark interest rates before the end of the year. Its one-year lending rate goes up by a quarter of a percentage point to 5.81% from 5.56%, effective Dec. 26th. The corresponding deposit rate rises to 2.75% from 2.50%. It is the second rate rise in as many months and another turn of the screw in the fight against inflation. We expect to see more rate rises in 2011 to push up the price of credit as well as more quantitative measures to reduce its supply. Yesterday, Hu Xiaolian, a deputy governor at the People’s Bank of China told a meeting of bankers that China “should maintain a reasonable and moderate credit growth next year that is in line with the country’s goal in economic development and inflation control”.

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China’s Exchange Rate Policy Switch Not All It May Seem

We have long argued that China would allow its currency to appreciate, as much of the rest of the world is demanding and which in the long-term is in its own economic interest, but that it would do so at a time of its own choosing. That indeed has been Beijing’s public position regardless of the volume of the rhetoric coming out of Washington and Brussels. Today’s unexpected announcement by the People’s Central Bank of China that it will return to its pre-financial crisis managed floating exchange rate regime introduced in 2005 to replace the yuan’s peg to the dollar but suspended in July 2008 following the onset of the global financial crisis, is more style than substance, though there is some substance there.

No one should think, though, that Beijing is letting the currency float freely. The central bank is explicit that there will be no ‘large-scale appreciation of the yuan” and that the previously used narrow bands within which the currency can move will be re-instituted. That means that any appreciation in the exchange rate is likely to be modest and gradual. And while the announcement comes ahead of the G20 summit in Toronto, with the intention, we assume, of taking some of the sting out of the issue there, there is no indication of the timetable by which it will be implemented. We don’t expect the central bank to be in much of a rush. Nor do we think that all China’s economic policymakers are yet convinced of the solidity of global economic recovery that allowing the yuan to appreciate would imply and which the central bank cites as a justification for the policy switch.

There is also an opaque reference in the central bank’s statement that “continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies”. While no one has known exactly what the composition of the reference basket was, beyond being overwhelmingly U.S. dollars, given the changing nature of China’s trade over the past couple of years, the new mix could have a material effect on the politically sensitive U.S. dollar-yuan rate that would mean that rate not moving much, and the yuan-euro rate moving more, a combination that wouldn’t appease the increasingly bellicose critics of China in the U.S. Congress. If the euro remains weak, the yuan could conceivably depreciate against the dollar, which would really put the cat among the pigeons.

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Filed under China-U.S., Economy, Markets