On April 30, 2021, Seeking Alpha wrote the following about an escalating regulatory onslaught in China:
“Taking a page from the Ant Group playbook, China has imposed sweeping restrictions on the fast-growing financial divisions of 13 companies including Tencent (OTCPK:TCEHY), ByteDance (BDNCE), JD.com (NASDAQ:JD), Meituan (OTCPK:MPNGF) and Didi (DIDI). The requirements include stricter compliance when listing abroad, as well as curbs on information monopolies and the gathering of personal data. Companies must also restructure their financial units into holding companies and sever “improper links” between their existing payments services and financial products.”
This move by Chinese state regulators seems to be riding on the momentum from actions taken against Chinese billionaire Jack Ma back in late 2020. Chinese security regulators took aggressive action against the innovative Chinese financial tech firm Ant Group by canceling their IPO following Ma’s criticism of the Chinese banking system. Ma subsequently disappeared from the public eye for months after being summoned to meet with state authorities.
On February 23, 2021, CNN Business reported that there was reason to believe that the Chinese government would be drastically altering Ant Group in what could be seen as punishment for speaking ill of Chinese state banks when it writes,
“The reports suggest that the Alibaba-affiliated company may now have to follow rules similar to those required of traditional Chinese banks — a move that could force it to scale down its aspirations to be a dominant force in the tech world.”
On April 13, 2021, CNN Business gives an update when it confirms,
“Chinese regulators have ordered Ant Group, which owns the hugely popular Alipay app, to overhaul its operations and become a financial holding company supervised by the central bank. The announcement late on Monday came just days after Ma’s online shopping giant Alibaba was hit with a record $2.8 billion antitrust fine.”
The move seems to be the Chinese Communist Party’s way of making an example of Jack Ma and Ant Group by forcing the once-innovative fintech firm to become the equivalent of a state bank. Ma’s feud with the CCP began when he made critical remarks about China’s outdated state banking system during a conference, making the case for an innovative company like Ant Group.
Now the same fate has been dealt to the 13 Chinese tech giants, which would not only render them far less dynamic and innovative but also turn them into surveillance tools for the CCP to gather more data on consumers.
CNN summarizes the demands of the CCP when it writes,
“The regulators laid out seven demands, starting with the requirement that “all financial activities be included in financial supervision, and financial businesses must be licensed to operate.” The way tech firms run their financial units should become more “standardized,” the central bank added, and should in some cases require them to apply to set up financial holding companies.”
A Closer Look at the Fintech Onslaught
This development is interesting given China’s unique economic position as a highly authoritarian regime with a fast-growing economy. It was once thought by many Western observers that economic liberalization and growth in China would give way to liberal democratic reforms. That is because when living standards increase people start to ask more questions as they become more educated and less concerned with where their next meal comes from. Furthermore, highly advanced economies need dynamic and innovative companies that can compete on the global stage, which requires liberalization of regulations both economic and social. Liberalization gives way to foreign influences and cultural exchanges which further weakens the power of the CCP to maintain an iron grip on everything its citizens see and do.
As demonstrated by Jack Ma and Ant Group, the development of highly advanced tech firms has created tension and questions about the antiquated state-owned banking system which gives way to questions about the capabilities of the CCP itself. All these factors pose a considerable problem for the Chinese government.
CNN Business reports on a development back in March 2021 that provides evidence that this could be the case when it writes that even the Chinese President was taking notice of the behavior of tech firms,
“Xi stressed the need to regulate “platform” companies to maintain social stability during a meeting of China’s leaders on Monday, according to state-owned Xinhua News Agency. The phrase “platform company” in China typically refers to businesses that offer online services for customers.”
The Chinese president added that it was necessary to strengthen regulation of the internet sector, according to a summary of his remarks published by Xinhua. The state media outlet reported that “all financial activities must be included in financial regulations,” according to Xi.”
Much like anything, this move by the CCP isn’t as cut and dry as it may seem. There are genuine antitrust concerns associated with these large financial tech firms as they hold a considerable portion of the Chinese market share. The Wall Street Journal notes,
“Baidu, Alibaba and Tencent—received about 67% of digital ad revenues in 2018, up from 61% in 2015, according to consulting firm TS Lombard.”
E-commerce giants like Alibaba also engage in monopolistic behavior such as forcing partner companies to exclusively sell on their platform. This issue is complicated by the fact that the Chinese government maintains a strong grip on all economic activity in the country, which likely hampers the ability of competitors to challenge these e-commerce giants. However, The Wall Street Journal also notes,
“The antitrust push is conspicuously silent on some of the biggest rent-seekers of all: China’s large state-owned banks, which now stand to benefit from fintech firms’ clipped wings.”
In light of these facts, it seems that the actions of the Chinese government on the surface may be about policing anticompetitive behavior to increase innovation and competition, but there seems to be an even deeper motive for political control. This should come as no surprise as Reuters reported in September of 2020 that the CCP was demanding more private sector loyalty which includes political alignment. Of course, this strangling of the private sector will lead to slower economic growth, less innovation, and reduced investment which may play out in favor for the United States geopolitically.
Such a development is actually not inconsistent with Chinese history. China has always been an authoritarian and closed country that has managed to make great leaps of progress before falling into disarray as has attempted to manage stagnation and foreign threats. One does not need to look further than the last Chinese imperial dynasty to see this timeline play out. History does not repeat itself but it certainly does rhyme.
What Could This Mean?
In order to compete on the global stage, China needs innovative and creative companies but that also requires freedom both economic as well as social. Such freedom inevitably leads to people asking questions which the CCP can’t have. This fintech crackdown could be emblematic of China’s authoritarian growing pains and it remains to be seen if they will even be able to balance economic progress with political control. This move will certainly have consequences for short-term investment and economic growth in China. It’s even possible they might end up killing the goose that laid the golden egg.
Perhaps this is how the free world breaks China’s authoritarian model, by forcing them to increasingly compete on the open market or risk sliding into irrelevance.