China’s crackdown on its technology and fintech champions shows no sign of easing.
In recent weeks Alibaba has been slapped with a $2.8 billion fine for anti-competitive practices, with the State Administration for Market Regulation also launching an investigation into food delivery giant Meituan for alleged monopolistic practices.
The central bank then got in on the act, summoning 13 digital companies including Tencent, Baidu and TikTok-owner ByteDance to Beijing to order them to comply with whatever regulations it deemed necessary.
“Beijing is cracking down on technology in general and fintech is one part of that,” says a Hong Kong-based banker. “This is just the start.”
How did this clampdown begin and how much longer is it likely to run?
To the first part, it’s easy to point to Ant Group founder Jack Ma’s comments at a financial forum in Shanghai last October.
It’s hard to imagine a more poorly timed and crafted speech. Regulators and senior state bankers were in the audience that day. They heard Ma accuse them of stifling innovation and having a “pawnshop” mentality.
Turning point
Whether he was right or wrong, it marked a turning point – for everyone. Less than two weeks later Ant’s world-record IPO was cancelled, shortly before its shares were set to start trading in Hong Kong and Shanghai.
Since then the limelight-loving Ma has gone to ground, appearing just once in a pre-recorded video. On May 24 he was told to step down as president of Hupan University, an elite business academy he founded six years ago in Hangzhou.
Regulators have told Ant to restructure itself as a financial holding company. The firm is also believed to be exploring ways for Ma to divest his stake and cede control – yet more evidence of how toxic the billionaire’s brand is right now.
It’s plausible to see this as a war on one man by a political system that brooks no dissent, but the fault lines run far deeper. In truth, Beijing had been weighing up a hit on its digital platforms for some time.
Back in September the central bank ordered all non-bank companies that own two or more financial institutions to register as financial holding companies.
That was a coded way of telling big fintech generally, and Ant specifically, that the days of generating outsized profits by acting like a bank but pretending not to be one were over.
It’s easy to see this as a war on one man by a political system that brooks no dissent, but the fault lines run far deeper
Ma’s ill-starred speech gave a host of powerbrokers, from regulators to state bankers, the cover they needed to come down hard on first Ant, then its digital rivals.
“These tech firms were getting too large and [regulators were] concerned that the financial sector was no longer dominated by its state banking giants,” says Andrew Collier, China country analyst at New York-based GlobalSource Partners.
For Beijing the question is what it does now. If its aim was to clip Ma’s wings, that has been accomplished. If it really wants to break up its big fintech companies, that would create any number of unforeseeable repercussions and aftershocks.
Baidu, Tencent, Ant and Alibaba are vast and highly competent corporations. Last week, Tencent posted a first-quarter profit of Rmb47.8 billion ($7.5 billion), up 65% on the previous year. It also – perhaps with a nod to improving its image as a more socially valuable organization – announced plans to plough Rmb50 billion into carbon neutrality and rural recovery projects.
In an ideal world, or at least the one visualized by mainland policymakers, these firms would become global players akin to Facebook or Google, yet would be held tightly within the state’s orbit.
Is it possible to have it both ways? Can any firm famed for its aggressive pursuit of market share and digital innovation succeed if it is forced to check in with Beijing every time it has a good idea?
Other challenges loom. Regulators everywhere are asking ever-louder questions about how personal information should be used. But China’s nervousness about its fintechs’ huge databanks goes much further. Ant’s clever algorithms ensured that state lenders, and even some international banks, used it to channel credit to millions of private firms and retail borrowers.
In just a couple of years, in the run up to its failed listing, it had become not just a serious financial player but perhaps the country’s biggest data gatekeeper; a fact that evidently made Beijing uncomfortable.
Widespread inefficiencies
If rule makers want to seize Ant’s data, they can – there’s nothing to stop them doing so. They could temper the power of the big digital platforms tomorrow or pick these corporate giants apart piece by piece.
But what then? The fact that these firms rose so far, so fast, is due to the many and widespread inefficiencies of the country’s financial system.
State banks have long dragged their feet on digital innovation. There are exceptions – Ping An was recognized by Euromoney as best digital bank in the world in 2020 – but most onshore lenders are laggards in this space, not leaders.
They know digital matters, it’s just not clear they care about it. None have come close to creating the efficiencies and economies in digital payments systems fostered by Ant and do not look likely to do so.
Marginalizing Ant and its peers also fails to address another fundamental issue: who will deliver credit to the innovative young private-sector firms that Ant targeted, and which mainstream banks have happily ignored for years?
China’s crackdown on its fintech champions shows no sign of letting up. It appears to be committed to walking this road. It should be wary of going too far.
