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Opinion | Ant Group: Chinese authorities begin regulating Chinese fintech industry with financial transactions

Alibaba's affiliated fintech company Ant Group (CFP)

By Alan Leung, Blogger specialized in current affairs

On Sunday, the People's Bank of China (PBOC), the Chinese central bank, deputy governor Pan Gongsheng instructed Ant Group, the world's largest fintech company and the parent company of the world's largest digital payment platform Alipay, to rein in the influence of technology on its financial services in a statement, as the Chinese regulators began ring-fencing the industry to prevent the industry's uncontrolled growth in lending from becoming a financial risk.

Pan's statement told Ant Group to refocus on its online payments' roots, forbid irregular competition and protect customers' privacy in its personal credit rating business. Pan also instructed the group to establish a financial holding company to manage and run asset-backed securities in accordance with regulations in related businesses, rectify any irregularities in its insurance, wealth management and credit businesses while speaking on behalf of PBOC and other major financial regulators.

While international media has been spinning all kinds of stories since the authorities in China held back Ant's world-record-breaking US$34 billion dual listing IPO offering in November. Many of them suggested that China had turned on Jack Ma after Jack criticized the Chinese financial regulators for being obsessed with minimizing risk and accused China's banks of behaving like "pawn shops" by lending only to those who could put up collateral in his Bund Summit speech in October.

Western media further attempted to play into the anti-communist sentimental and the perception of alleged unfairness of the Chinese communist party (these media has been trying to instill into people minds over the years), claiming the move was a sign that Beijing is heightening its crackdown on Jack Ma's business interests and power after the breakdown in relationship between the group's founder and the authorities. These media also claim the group has become so big that it is beginning to threaten the party.

These media got one thing right, Ant Group has become too big to fail. However, the group's massive size doesn't threaten the Chinese communist party as these media claimed but the Chinese economy and social stability, and to a lesser extent the world economy. We shouldn't overread the move as the Chinese government has signaled that it's going to look at anti-competitive and abusive practices by dominant platforms for a long time, because the country's internet ecosystem dominated by tech titans like their US counterparts sometimes bully smaller competitors which kill innovation.

Moreover, the Chinese Government was probably more concerned about the threats towards the economy, especially when Chinese banks have used the platform excessively to underwrite consumer loans at a time when the concerns of defaults and lenders' asset quality grew extensively in a pandemic-hit economy. We had all seen the destructive effect and economic shock the 2007-2008 US financial meltdown brought to the world when the lack of regulatory oversight allowed big companies to manufacture profit and lend excessively without being backed by enough real assets and asset-backed securities.

In addition, we need to consider the possibility of an Alipay knock-on effect if anything were to happen to the Ant Group. Alipay occupied approximately 54.4% of the Chinese third-party payment provider market share in 2019 and the total transactions in the same year through the platform worth some RMB 56 trillion (approx. US$8.16 trillion), as the leading third-party payment provider in the country any mishap could cause a massive shock and unimaginable damage to the Chinese economy.

It's important to note that China doesn't only have the world's largest population and 2nd largest economy but is also the global leader in mobile payments penetration rate, reaching approximately 86% in 2019 when the world average was only around 34%. Around one-third of the consumer payments in China were already cashless in 2017, and three-fourths of Chinese smartphone users (the world largest number of smartphone users, approximately 851.15 million users in 2019) made a mobile point-of-sale purchase in the same year (compared with one-fourth of American users).

As a result, the risk China faces from a failure of Ant Group will not be limited to a break down of the banking systems like the US financial meltdown caused by excessive lending from the fintech company taking advantage of the lack of regulation in the sector, but through Alipay, which many of Ant's financial services are provided through, it could cause a devastating blow to the entire Chinese economy and social stability, while taking out the e-commerce market which currently accounts for 23.1% of the overall retail spending in China and the consumer digital payment ecosystem.

Hence, we should be able to understand the reasoning and importance of the Chinese authorities' move to regulate this previously unregulated sector. The Chinese authorities are only ring-fencing the fintech industry and did not bar the Ant Group from continuing its non-online payments businesses. They're demanding the group to open specialized subsidiary financial companies to manage its financial-related businesses in accordance with Chinese laws and industry regulations as it relates to financial entities and markets.

Ring-fencing is nothing new, the British's Financial Services (Banking Reform) Act, 2013 brought in after the 2007-2008 financial crisis required all retail bank operations in the UK to be operated through separate entities and sub-groups, within each wider bank group to increase depositor protection. Thus, the new ring-fencing regulations is not a death penalty as many suggested, it's only designed to minimize previous fintech loophole and require such companies to hold enough asset-backed securities to support its financial business.

The move will force the Ant group and other similar fintech companies to curb excessive lending because these companies will need to take on more risk when they approve new loans, as they are forced to contribute and hold a large portion of assets to support such operations instead of simply providing such services through cooperation with bank as a third party services provider. The separation of entities and sub-groups within the wider group will also lower the overall risk of any mishap crossing over to other sectors.

All in all, the step taken to regulate the previously unregulated fintech industry and the move to redefine & enforce existing financial regulations by Chinese authorities is the act of a responsible government. This clearly shows the difference between China's socialism with Chinese characteristics and western liberal democracy. China pursues a market-based economy but will always reign in any unfettered capitalism while western liberal democracy tolerates and in some cases advocates for unfettered capitalism which over time turns into a Plutocracy.

More importantly, we should disregard all the absurd claims of the Chinese Government bringing down Jack Ma, it's clear the Chinese Government isn't trying to bring down these internet giants and there is little incentive to do so. The Chinese regulators are only trying to sound an alarm with its recent move to remind all internet enterprises to restrain their aggressive expansion strategies and avoid improper conduct which will eventually benefit the whole society. The Chinese Government should disregard all the noise the world is making and do what is best for its people.

 

The views do not necessarily reflect those of DotDotNews.

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