Credit: Shwangtianyuan, Creative Commons
For a brief window from 2013 to 2016, China’s government encouraged its private tech firms to enter finance and take on outdated state-owned banks. The People’s Bank of China (PBOC), one of the world’s largest central banks, bet that competition would force incumbents to modernize. That opening led to a golden age of financial innovation — and what could be the world’s largest initial public offering.
On Tuesday [Aug 25], Ant Group, the financial technology, or “fintech,” giant spun out of e-commerce behemoth Alibaba, filed for a dual listing in Hong Kong and Shanghai. Its planned IPO could raise as much as $30 billion and value the company at more than $200 billion. Ant is now worth significantly more than Goldman Sachs and Morgan Stanley combined in terms of market capitalization.
During the window when China opened banking to tech companies, fintech firms like Ant and Tencent’s WeChat started offering financial services with the tap of a mobile phone screen, along with ride hailing, travel bookings, and other lifestyle services. QR barcodes soon replaced cash. Today Ant and Tencent lend to half a billion customers and sell investment funds with trillions of renminbi in assets. Together they control around 95 percent of China’s 250 trillion renminbi online payment market.
But while big tech companies in China benefitted massively from the shift into e-commerce and online services, the fintech boom also led to an explosion of scams. After a Ponzi scheme collapsed in 2015 and wiped out $7.6 billion from nearly one million Chinese investors, policymakers started to reverse favorable fintech policies in 2016. Although Ant and WeChat maintain a formidable niche, authorities have been remarkably successful in defusing some of the riskiest elements of shadow banking in China without slowing economic growth, and while ensuring that China’s state-banks still dominate the financial system.
How’d they do it? First, reflecting a broader shift in Chinese politics, the Chinese Communist Party began to focus more on reducing risk rather than quickly leapfrogging to a tech-focused financial system. Market reforms and the rise of the private sector halted amid President Xi Jinping’s emphasis on creating bigger, better state companies. Corruption investigations broke up or scaled back debt-fuelled private empires.
Regulators also started to rein in tech giants. In the realm of digital payments — where fintech in China began — regulators barred Tencent and Alipay, Ant’s mobile payments business, from running their own interbank payment system, which they had done effectively for years. Before, tech giants used proprietary networks of accounts with major banks to move money. Now money has to transact through NetsUnion, a new national monopoly under the PBOC that is akin to UnionPay, China’s state monopoly for bank card payments.
NetsUnion sets standards and processes payments between online payment companies and banks. The move amounts to quasi-nationalization of payment systems built by private tech firms. The PBOC has also forced online payment companies to put all their client money in a near-zero-interest central bank account, thus depriving them of revenue worth billions of dollars.
In addition, a central bank-backed digital currency is already in the pilot stage. It may provide a powerful government payment alternative that competes with Alipay and WeChat Pay, and create yet another check on big tech’s power.
Apart from payments, government regulations have hobbled efforts by banks owned by tech firms to raise deposits. Banks owned largely by Tencent and Ant together only had around 430 billion renminbi in assets at the end of 2019. That’s miniscule compared to nearly 25 trillion renminbi at the top few state banks.
Securities regulators have also forced Ant to shrink its Yu’E Bao money market fund, which once drew hundreds of billions of renminbi from banks. A much-hyped pilot program to use big tech’s data to create credit scores and give unbanked people access to credit was abandoned amid concerns about conflicts of interest.
By 2018 the signs were unambiguous: Ant and Tencent were effectively ordered to stop competing for funds and customers with the big state banks.
For years, tech giants fended off political attacks from financial incumbents. At one point, Jack Ma, Alibaba’s founder, publicly attacked regulators and banks for trying to restrict Alipay transactions. Yet any successful large company in China has to read the political tea leaves carefully to stay out of trouble. By 2018 the signs were unambiguous: Ant and Tencent were effectively ordered to stop competing for funds and customers with the big state banks.
But while one might expect intensified regulation to weigh on their valuations, the opposite has happened. Ant’s IPO looks likely to more than triple its valuation from before the regulatory crackdown in 2016. Tencent, which has not spun off its financial businesses, recently nearly broke $700 billion in market capitalization, not far behind Facebook.
Ironically, government pressure may have been a blessing in disguise for companies and investors. Even if Ant and Tencent can no longer control the financial plumbing, they have continued to thrive in the new political era by pivoting to serve the largely state-owned financial sector, which is both politically safer and immensely profitable.
Fintech’s ever-stronger hold over data and customers, as well as sophisticated technology, means that legacy banks rely on their cloud computing infrastructure to store and process data. Legacy banks compete on big tech’s terms for hundreds of millions of customers looking to invest or take out loans. Banks also use tech firms’ machine learning expertise to detect fraud and manage risk.
Big tech also retains strong political influence by benefiting the government in ways beyond finance, like powering smart cities and developing the health QR codes that local governments used to open safely after the Covid-19 lockdown. So far, they have successfully fought off most regulators’ attempts to force them to share data with state-owned banks.
Chinese entrepreneurs such as Ma call companies like Ant “techfin,” rather than “fintech.” The inversion emphasizes focusing the financial system around technology, rather than adding it to the existing financial system. Even with the government’s U-turn on the sector, Ma’s techfin concept is still how around half a billion Chinese consumers experience financial services: they access payments, loans, investments, and even insurance through Alipay or WeChat instead of dealing directly with banks.
Nevertheless, in spite of the sector’s growth and Ant’s sensational upcoming IPO, fintech is a shiny veneer on a financial system dominated by state-owned banks. Under tighter government control, the sector will likely remain that way for at least the near future.
Martin Chorzempa is a research fellow at the Peterson Institute for International Economics in Washington, D.C. He is a Harvard Kennedy School graduate and a Fulbright Scholar, and he has a forthcoming book on Chinese internet finance.
