KazPost

Kazakhstan News
Friday, Mar 29, 2024

China puts shackles on fintech as technology risks usurping finance

China puts shackles on fintech as technology risks usurping finance

New fintech rules on online micro lending could force China’s internet giants to rethink their business practices on co-lending, analysts said.

Late at night on Monday November 2, a blog appeared in the official Sina.com account of the Chinese government’s mouthpiece news agency Xinhua, hours after regulators summoned executives of the world’s largest fintech company to tell them that the rules governing their industry were evolving.

Using the pseudonym Xiuxin, the blogger told a story about the potential harm that could be done by loose words, unrestrained behaviour and indiscretion, accompanied by an artwork showing a white horse afloat in a sea of clouds, an allusion to the Chinese name of one of China’s wealthiest men, Jack Ma.

A day later, the blog’s implication became apparent. Regulators did the unthinkable: pulling the rug from under the largest capital raising exercise in global finance – the US$35 billion initial public offering in Hong Kong and Shanghai by Ant Group– 48 hours before trading was due to start, citing changes in regulatory environment that cause the fintech giant to be in breach of market disclosure rules.


Artwork on Xinhua’s blog on Sina.com, posted on November 2 and falsely attributed to the late Japanese painter and poet Kaii Higashiyama, shows a white horse in the artist’s signature style suspended on a sea of clouds.


The new rules are part of regulators’ attempts to redefine and rethink fintech, amid concerns that technology has usurped the fundamentals of finance, creating potential systemic risks in the world’s second-largest economy.

“Chinese fintech groups have, in some cases, grown so big that their collaborations with banks are increasing contagion risks in China’s financial system,” said Grace Wu, an analyst at Fitch Ratings. “We expect tighter regulations on fintech companies to continue.”

What constitutes fintech is quietly being argued over in China, the world’s largest fintech market, where physical cash is hardly used in daily life and cashless mobile payments topped US$14 trillion in the fourth quarter of 2019, according to the People’s Bank of China(PBOC).

The debate came to a head on October 24 at a Shanghai conference, where Ma, speaking to an audience of financial regulators and senior government officials, outlined a fintech vision that uses big data analysis, cloud computing and artificial intelligence algorithms to reduce financial risks, drawing a stark contrast to the collateralised form of bank lending he described as being akin to pawn shops.

But the excessive use of technology in finance – especially the little-understood mixture of big data, artificial intelligence and cloud computing – may be too potent for regulators who are wary of defaults and disruptions of financial services spilling over into social unrest.

The US-China conflict over trade and technology “is no longer the single biggest risk for investors in Chinese technology”, said TS Lombard’s China policy analyst, Eleanor Olcott.



“Dramatic as the suspension [of Ant’s dual listing] was, it forms part of a wider political drive as the leadership seeks to widen and consolidate its control over finance and technology as well as over other key sectors.”

As China transformed from an export-driven economy to one reliant on consumer spending over the past decade, fintech conglomerates rose to serve the country’s 11.8 trillion yuan (US$1.8 trillion) consumer loans market, creating new risks outside the tightly regulated banking system.

Until recently, fintech companies had been given room to roam, enabling lenders in China’s so-called shadow banking system to grow into some of the world’s most valuable companies.

These “big tech” firms, including the likes of JD Digits, Lufax, Ant Group, have become the top brass of China’s nonbank lenders attracting big cheques from international investors. Ant is an affiliate of Alibaba Group Holding, which owns South China Morning Post.

As internet giants and online lenders such as 360 Digitech, Lexin and Yiren Digital account for a much larger piece of China’s consumer loans, regulators are increasingly unnerved by their cosy relationship with banks in the trillions of yuan of loans extended to borrowers.

Their combined share may grow to a third of China’s 11.8 trillion yuan (1.8 trillion) consumer loan market this year, from 17 per cent in 2017, according to an April research note by China Renaissance.

Unlike other countries where nonbank lenders lean heavily on the capital markets to fund their businesses, nonbank players in China have to rely on traditional banks for capital to provide credit to borrowers. By letting them operate outside the formal banking system, a broader systemic risk is becoming increasingly palpable.

China’s household debt rose to more than 60 per cent of gross domestic product (GDP) over the past five years. While less than America’s first-quarter debt-to-GDP ratio at 75 per cent, the pace rivals the expansion of consumer borrowing in the US just before the 2008 Global Financial Crisis, the Rhodium Group said in May.


Non-performing loans (NPLs) among Chinese banks.


At the same time, the banking sector’s non-performing loans ratio rose to a 11-year high of 1.96 per cent in the third quarter. That marks the end of fat margins for fintech companies, as their activities are ring-fenced and they can no longer harvest the difference in rates off banks’ capital.

“We see an aggressive tightening over the past two years on China’s online lending, as some of the smaller banks have become more aggressive in their partnership with online platforms,” said Fitch’s Wu, adding that “banking systemic risks and household leverage are the issues at stake”.

Proposed rules in fintech, which would require lenders like Ant to pony up the equivalent of 30 per cent of their loans book in capital, may substantially change their business model of co-lending alongside banks.

The message from regulators is clear, said Liang Tao, vice-chairman of the China Banking and Insurance Regulatory Commission (CBIRC). The regulator must group all financial activities from fintech firms under the same comprehensive ambit as banks, he said during a Beijing financial forum last week.

“Fintech has improved the efficiency of financial services, but it has not fundamentally changed the core nature of finance,” Liang said.


Liang Tao, vice-chairman of the China Banking and Insurance Regulatory Commission, said fintech activities should fall under the same regulation structure as traditional banks.


The draft rules for online micro loans were aimed at China’s legion of small banks, the so-called city and rural commercial banks which together hold 26 per cent of the sector’s assets in September, said Jefferies Hong Kong’s analyst, Chen Shujin.

These banks, many with weak capital buffers, are motivated by their partners’ ability to lend to individual borrowers across provincial boundaries: banks in the rural west or north are especially keen to lend to borrowers in the wealthy coastal areas, she said.

As banks essentially provide their balance sheets to back up online loans, any default could force the banks to book impairment losses – which, if serious, could trim their earnings and bite into their core capital.

“We expect slower growth in online microloans and lower profitability for loan facilitation businesses,” said Chen, adding that “regulators are cautious on high-yield consumer loans despite labels of inclusive financing or financial innovation.”


Regulators are increasingly wary of how Alipay and other third-party payment providers are becoming almost too big to fail.


Signs already abound that indicate the central bank and other regulators are wary of how third-party payment networks such as Ant’s Alipay and Tencent’s
WeChat Pay are becoming almost too big to fail.

The two account for over 90 per cent of mobile payments and are deemed “systemically significant infrastructure” operators in China by some central bankers.

Regulators are also keen to protect the interests of state-owned banks, an important conduit for executing China’s economic policies.

Banks were asked to sacrifice as much as 1.5 trillion yuan (US$228 billion) in 2020 profits to finance cheap loans, cut fees and deferred repayments to help small businesses survive the coronavirus pandemic.

Regulators are hence keen to ensure that any innovation in the name of fintech does not compromise the banks’ role in safeguarding economic growth and stability.


China’s central bank governor Yi Gang said the digital yuan has been used in more than 4 million transactions during trial.


That is why some of the fintech firms’ money market funds such as Ant’s Yu’e Bao, once the world’s largest with US$267 billion of assets in 2018, have also been targeted by regulators for downsizing due to their competition with banks’ deposits, said CMB International Securities’ analyst Terry Sun.

“If banks have to retain their deposit base, they will have to raise their deposit rates,” Sun said. “As banks ultimately have to protect their net interest margins, this would cause them to price their loan interest rates higher, affecting corporate borrowers.”

The new rules on micro loans – loans of typically less than 50,000 yuan (US$7,600) – follow a years-long effort by the Chinese government to cut China’s financial risk, known as deleveraging, to alleviate the buildup of bad debt caused by the massive spending spree by some its biggest private-sector companies.

Anbang Group, whose portfolio at one stage included the Waldorf Astoria hotel in New York and rural banks in China, was once one of the country’s most acquisitive companies until it was seized by Beijing in 2017, and its former chairman was jailed for fraud.

The company formally applied to disband in September and liquidate after selling much of its assets. HNA Group and Dalian Wanda Group are two other debt-laden conglomerates forced to sell off assets as part of the deleveraging purge.


A security guard tries to prevent photos being taken outside the Anbang Insurance building in 2018. The company was seized a year earlier by Chinese authorities after its former chairman was accused of fraud.


Last year, Baoshang Bank became the first Chinese lender to be nationalised by regulators in two decades to contain its credit risk.

The lender was part of the business empire of the financier Xiao Jianhua, which ran into trouble after Xiao’s Tomorrow Group failed to repay billions of yuan in loans. Parts of Xiao’s empire were seized by authorities. The government also took over regional lenders Bank of Jinzhou and Shandong province’s Hengfeng Bank last year.

Another cause for concern: China’s biggest banks are reporting their first drop in profits since 2008 after they shored up their reserves for potential soured loans amid the Covid-19 pandemic.

The banking industry will have to dispose of 3.4 trillion yuan in non-performing loans this year, a dramatic increase from last year’s 2.3 trillion yuan, the bank regulator Guo Shuqing said in August, warning that the tally could climb even higher next year.

Regulators are also seeking to avoid a replay of the scandalous blowout four years ago in the peer-to-peer lending industry, which left depositors out of pocket by 800 billion yuan (US$121 billion) when the number of lenders shrank from more than 6,000 in 2016 to just 29.


A QR payment code for Ant’s Alipay hangs above a stall for customers to scan with their smartphones to make electronic payments at a market in Beijing.


The risk averseness also highlights the lack of financial sophistication among households in China, even as the prevalence of the internet has steepened the learning curve among the younger generation.

Regulators will look to avoid similar blowbacks from consumers by reining in the nation’s tech giants, with new proposals to regulate fintech and monopolistic behaviour, analysts said.

“The tightening of regulations governing fintech also underscores how the Chinese government and central bank’s focus has, during the second half, shifted to reducing risks from protecting growth during the first half by encouraging consumption when the country was still struggling to recover from Covid-19,” said Jefferies’ Chen.

“When the economy has found its footing, controlling retail leverage regains priority.”

Newsletter

Related Articles

KazPost
0:00
0:00
Close
It's always the people with the dirty hands pointing their fingers
Paper straws found to contain long-lasting and potentially toxic chemicals - study
FTX's Bankman-Fried headed for jail after judge revokes bail
Blackrock gets half a trillion dollar deal to rebuild Ukraine
America's First New Nuclear Reactor in Nearly Seven Years Begins Operations
Southeast Asia moves closer to economic unity with new regional payments system
Today Hunter Biden’s best friend and business associate, Devon Archer, testified that Joe Biden met in Georgetown with Russian Moscow Mayor's Wife Yelena Baturina who later paid Hunter Biden $3.5 million in so called “consulting fees”
Singapore Carries Out First Execution of a Woman in Two Decades Amid Capital Punishment Debate
Google testing journalism AI. We are doing it already 2 years, and without Google biased propoganda and manipulated censorship
Unlike illegal imigrants coming by boats - US Citizens Will Need Visa To Travel To Europe in 2024
Musk announces Twitter name and logo change to X.com
The future of sports
Unveiling the Black Hole: The Mysterious Fate of EU's Aid to Ukraine
Farewell to a Music Titan: Tony Bennett, Renowned Jazz and Pop Vocalist, Passes Away at 96
Alarming Behavior Among Florida's Sharks Raises Concerns Over Possible Cocaine Exposure
Transgender Exclusion in Miss Italy Stirs Controversy Amidst Changing Global Beauty Pageant Landscape
TikTok Takes On Spotify And Apple, Launches Own Music Service
Global Trend: Using Anti-Fake News Laws as Censorship Tools - A Deep Dive into Tunisia's Scenario
Arresting Putin During South African Visit Would Equate to War Declaration, Asserts President Ramaphosa
Hacktivist Collective Anonymous Launches 'Project Disclosure' to Unearth Information on UFOs and ETIs
Typo sends millions of US military emails to Russian ally Mali
Server Arrested For Theft After Refusing To Pay A Table's $100 Restaurant Bill When They Dined & Dashed
The Changing Face of Europe: How Mass Migration is Reshaping the Political Landscape
China Urges EU to Clarify Strategic Partnership Amid Trade Tensions
Europe is boiling: Extreme Weather Conditions Prevail Across the Continent
The Last Pour: Anchor Brewing, America's Pioneer Craft Brewer, Closes After 127 Years
Democracy not: EU's Digital Commissioner Considers Shutting Down Social Media Platforms Amid Social Unrest
Sarah Silverman and Renowned Authors Lodge Copyright Infringement Case Against OpenAI and Meta
Why Do Tech Executives Support Kennedy Jr.?
The New York Times Announces Closure of its Sports Section in Favor of The Athletic
BBC Anchor Huw Edwards Hospitalized Amid Child Sex Abuse Allegations, Family Confirms
Florida Attorney General requests Meta CEO's testimony on company's platforms' alleged facilitation of illicit activities
The Distorted Mirror of actual approval ratings: Examining the True Threat to Democracy Beyond the Persona of Putin
40,000 child slaves in Congo are forced to work in cobalt mines so we can drive electric cars.
Historic Moment: Edgars Rinkevics, EU's First Openly Gay Head of State, Takes Office as Latvia's President
An Ominous Shift in Warfare: Western Powers Risk War Crimes and Violate International Norms with Cluster Bomb Supply to Ukraine
Bye bye democracy, human rights, freedom: French Cops Can Now Secretly Activate Phone Cameras, Microphones And GPS To Spy On Citizens
The Poor Man With Money, Mark Zuckerberg, Unveils Twitter Replica with Heavy-Handed Censorship: A New Low in Innovation?
The Double-Edged Sword of AI: AI is linked to layoffs in industry that created it
US Sanctions on China's Chip Industry Backfire, Prompting Self-Inflicted Blowback
Meta Copy Twitter with New App, Threads
The New French Revolution
BlackRock Bitcoin ETF Application Refiled, Naming Coinbase as ‘Surveillance-Sharing’ Partner
Corruption in the European Parliament - Business as usual
UK Crypto and Stablecoin Regulations Become Law as Royal Assent is Granted
Paris Suburb Grapples with Violence as Curfew Imposed: Saint-Denis Residents Express Dismay and Anger
A Delaware city wants to let businesses vote in its elections
Alef Aeronautics Achieves Historic Milestone with Flight Certification for World's First Flying Car
Google Blocked Access to Canadian News in Response to New Legislation
French Politicians Advocate for Pan-European Regulation on Social Media Influencers
×