FINANCIAL TECHNOLOGIES “cause turmoil when loosed” yet “perish once regulated”, a deputy governor of China’s central bank observed last year. This is an apt description of the dilemma facing the country’s regulators. Innovation has swept its financial markets over the past decade. It has produced some of the world’s most valuable technology companies, such as Ant Group, and in some cases, such as peer-to-peer (P2P) lending, led to fraud and losses. Regulators have fintech in their sights. But what is it they hope to achieve?
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The rise of fintech in China has been unmatched elsewhere. Cash has vanished from cities, replaced by mobile and QR-code payments. Tech groups processed 210trn yuan ($32trn) in payments in the first nine months of 2020, twice the amount in 2016. Consumers often manage wealth products or buy insurance on their phones; borrowing to shop on virtual malls has never been easier. Tech firms helped broker trillions of yuan in micro-loans last year.
That rapid growth far outstripped regulatory capacity. Much of the oversight fell to provincial watchdogs that were simply outgunned. A former mayor of Chongqing complained that Ant used the jurisdiction to securitise 3bn yuan in loans many times over to raise more than 300bn yuan. Beijing’s vice-mayor said in November that its finance bureau had 70 staff policing 70,000 firms. The central-bank official wrangling with the dilemma admitted that regulation had “malfunctioned”.
The state is rectifying that. Its efforts can have drastic results. Just look at P2P lending, where widespread fraud and billion-dollar scandals drew regulators’ attention in 2016. The sector has been largely wiped out. Outstanding loans from nearly 7,000 platforms fell from about 1trn yuan in May 2018 to half that by 2019 (see chart). According to regulators, all platforms had closed down by November last year. Losses have devastated some households.
The campaign has gone on to target other forms of internet-enabled finance. Its culmination has been an attack on Ant. Regulators halted its $37bn initial public offering (IPO) two days before its launch in November 2020 and published draft rules targeting Ant’s lucrative micro-lending business. An estimated $100bn has been wiped off the $310bn valuation it fetched ahead of its listing. Ant and its founder Jack Ma have been held up as bad actors. Gavekal Dragonomics, a consultancy, concluded after the death of the IPO that China’s “frontier era for fintech is now over”. On March 12th Simon Hu, Ant’s chief executive, became the latest senior employee to leave the firm.
The final rules, published in February, take effect next year. In contrast with P2P, they do not seek to crush the fintech giants. Instead the state has three main aims for fintech’s next phase. The first is to control tech-linked leverage. The revelation in its prospectus in July that Ant had facilitated some 1.73trn yuan in loans off its balance-sheet, but on banks’, was a warning to regulators. The model, copied by other tech firms, incentivises the companies to broker micro-loans for a fee. Yet they face almost no risk if borrowers fail to repay.
The new rules will make Ant and other mobile lenders look more like banks by making them provide the funds for at least 30% of the loans they make. As of June Ant had put up only 2% of the capital in its micro-loans business, which had kept its cost of capital low and limited its exposure to bad debt. Banks will be allowed to write no more than 50% of their loans through fintech partners, and must limit such lending to 25% of their tier-1 capital. This will force tech firms to work with a few big banks.
Ant itself is transforming its freewheeling fintech operations into a financial holding company. The central bank has said it wants the firm to “return to its roots”. That could mean Ant’s businesses outside of payments, such as insurance, wealth management and consumer lending, will come under fire.
The state’s second aim is to control data. Many of the tech groups operate vast networks of services—from shopping and ride-hailing to food delivery and health services—that collect dozens of data points from hundreds of millions of users every day. It is these data that help them derive rich credit appraisals for loans. The central bank is strong-arming tech firms into sharing this valuable information in the hope of building a central database.
The attempt to rein in leverage and break up data monopolies has met with praise from several quarters. “There is indeed an urgent need for upgrading the regulatory framework,” says Chi Lo ofBNP Paribas Asset Management. Even a prominent tech investor says the tech giants had “abused their market power” and that it was time they faced scrutiny.
Ant’s data-modelling largely held up even through the worst of China’s economic contraction during the early outbreak of covid-19, says an adviser who has seen its loan-performance data. But the wider micro-lending boom has failed, says an executive of a large fintech firm in China. Credit-hungry borrowers have built up debts across platforms, often leaving lenders in the dark. A central scoring system will come at the expense of Ant and Tencent, which have the most user data. But for smaller tech groups it will be a boon.
The state’s third objective, to play a more active role in fintech, is more controversial. Without help from tech companies, banks’ consumer lending is bound to hover around 22% of their balance-sheets, the dismal industry average for the past decade, reckons BNP. Simply handing over data to the government is not enough to boost lending, says a consultant who works with the tech firms. The data lose their value when separated from the network of daily interactions hosted by the tech companies. The task for regulators is therefore to keep banks and tech firms connected. The interactions will be monitored more closely by regulators. Banks’ reporting standards for tech-linked lending have already become stricter.
Several cities have launched regulatory “sandboxes” to test new technologies before they are deployed widely. The state looks set to dominate these. Banks have launched most of the 60 projects in the sandboxes, notes Plenum, a consultancy, with many large state lenders involved.
Moreover, the central bank is testing a digital currency. The so-called “eCNY” is expected to give the state more control over payments and a better view of cashflows throughout the economy. No internet platform could raise billions of yuan without alerting the authorities. The currency could disrupt mobile-payments operators such as Ant and Tencent—it is even being designed to be used offline, giving the government an edge over the fintech firms. The state hopes that designing its own financial technologies will cause less havoc. Private-sector firms may disagree. ■
Editor’s note (March 12th 2021): This article has been updated since publication.
This article appeared in the Finance & economics section of the print edition under the headline “Mood swing”