Repercussions from China’s move to hit big fintech where it hurts appear to have only just begun.
On November 13, a branch of China Construction Bank (CCB) in the Malaysian offshore financial centre of Labuan, cancelled a $3 billion print of digital bonds, minutes before they were set to go live on the virtual Fusang Exchange.
Radio silence ensued for eight days, before Fusang issued a statement saying that CCB, the world’s second-largest lender by assets, had “decided not to proceed” with the plan.
It added: “The exchange has accepted this decision, and is announcing the suspension of the listing with immediate effect,” noting that it had “initiated the return of all investors’ funds”.
CCB’s pioneering fundraising plan piqued the interest of investors, digital pioneers and, for all the wrong reasons, China’s watchful regulators.
It was an interesting deal from the start. The bank’s Labuan branch was the sole arranger and listing sponsor of the digital notes, which it wrapped inside a special-purpose vehicle it called Longbond.
The ultra-short-term bonds, which would have paid investors an annualized rate of 0.7%, were set to mature in February 2021.
The Chinese public [might] think CCB accepts bitcoin, which is against the law
Anonymous
Investors appeared to have had no misgivings about the blockchain-based bonds. According to Fusang, certificates of deposit worth $58 million were sold before the issue was suspended, all of which was returned to investors.
However, others clearly had concerns. As soon as the programme was axed, in the absence of any official statement, analysts rushed to fill in the blanks.
Some assumed that CCB had failed to ask for permission before forging ahead with the sale.
Another, more likely, answer springs to mind. Beijing is undergoing a period of digital introspection as it re-evaluates the role of its big and mostly privately owned financial technology firms.
Ant Group saw its landmark $34.4 billion initial public offering (IPO) in Hong Kong and Shanghai shelved on November 3, two days before its listing date. Jingdong Digits Technology, better known as JD Digits – another of China’s big fintech firms – faces a battle to complete its $3 billion IPO on Shanghai’s Star Market.
Both face rising scrutiny from mainland regulators keen to box in a clutch of firms who went under-regulated for perhaps too long.
Beijing in recent months has inundated the industry with rules that set hard limits on everything from financial leverage to cross-province lending, forcing Ant and co to adhere to the same strict scrutiny it reserves for its big state lenders.
More rules, ranging from anti-trust legislation to how technology firms collect, use and re-sell data, are also in the offing.
Cryptocurrency concern
CCB’s planned digital bond also caught the attention of legislators for other reasons.
The bank’s big idea was to issue digital tokens to retail and institutional investors, backed by deposits held at is Labuan branch. They could then be publicly traded using either US dollars or bitcoin.
“That’s where the concern was,” says one fintech analyst. “CCB Labuan claimed that it would only process in dollars, but Fusang Exchange also accepts bitcoin. That could make the Chinese public think CCB accepts bitcoin, which is against the law.”
China’s relationship with bitcoin is complex. It doesn’t recognise it as a currency or to permit it to be converted into fiat money. The state is engaged in a growing crackdown on official bitcoin intermediation.
There are three other key concerns here, all of which Beijing will have considered before axing the pioneering capital raise.
First, it was likely wary of letting one of its big banks issue digital tokens that could in theory be converted into bitcoin.
Mainland regulators are a cagey bunch who think up a worst-case scenario, then create legislation to avoid it taking place. In this instance, it would have feared the lack of investor protection and the uncertainty that bedevils cryptocurrencies.
A further complicating factor was the digital bonds were set to be issued on Ethereum’s open-source blockchain platform. Mainland regulators do not recognise Ethereum as a legitimate bond issuance channel.
Third and perhaps most importantly, Beijing has its own digital currency programme. In October, the central bank completed a pilot scheme in Shenzhen aimed at gauging the acceptance and use of a digital yuan, and stress testing it in the real world.
It is only a matter of time before it unveils a digital renminbi, to be used nationwide – and, in time, in international markets – by consumers, banks and businesses, in parallel with the real thing.
The last thing it wants to do right now is to give bitcoin a boost.
