President Xi Jinping has a lot going on right now. Just this week he slammed the weaponization of the global financial system, vowed to meet domestic growth goals, and called for the healthy development of China’s fintech sector. They’re all related.
In the first reference to economic targets since an April Politburo meeting, the Chinese leader on Wednesday said his country will “strengthen macro-policy adjustment and adopt more effective measures” to hit both social and economic development objectives for this year, Xinhua reported. That same day, Xi called for his government to improve regulation, strengthen “institutional weak links,” and support fintech companies in aiding so-called dual circulation, the state news agency said.
The latter is a reference to Beijing’s policy of boosting the domestic economy while shielding it from overreliance on international markets. Yet China has nothing to replace the Western-led global financial infrastructure that lets payments and capital cross borders with ease.
Alibaba Group Holding Co. founder Jack Ma was ill-advised when he criticized Chinese banks as operating with a “pawnshop mentality” during that infamous 2020 speech at the Bund Forum in Shanghai, but that doesn’t mean he was wrong. The nation’s financial leaders and regulators have indeed been slow off the mark when it comes to handling China’s fast moving fintech industry.
At the same time, Chinese regulators also get a bad rap. They have been criticized for censorship, but as long as hot young startups tread carefully in sensitive areas such as culture, content, and politics then they were allowed to operate like the wild, wild East.
Alibaba’s Alipay started off as little more than an aid to its e-commerce business by helping consumers pay for goods. Alipay did for Alibaba what PayPal did for E-bay at the turn of the century. Tencent Holdings Ltd. also got in on the game, leveraging its instant messaging platforms to allow users to send digital versions of the traditional red packets of cash swapped at Lunar New Year.
But unlike PayPal, these online payments platforms can now be used to buy goods and services in physical stores. Regulators didn’t seem to mind because customers were using their own money, the platforms didn’t challenge China’s homegrown Union Pay credit card, and there was little concern about risk management.
It was then a natural evolution for these companies to look at the vast sums of money sitting in their treasuries and think about what product they could build. Money management accounts were, for a while, a hot item among Chinese consumers. Lending, insurance and other financial services were another logical step.
Unsure how to manage them, regulators started cracking down. So when Ma took a swipe at Chinese technocrats for being too old school, he might have had a point. Yet he made the grave error of missing an even bigger point: Despite being a successful entrepreneur, Jack Ma was not in charge. Beijing was quick to show him who was. Ant Group Co.’s public listing was cancelled and the fintech sector seemed to be in lockdown.
But now Xi Jinping needs them. Despite being among the first countries with plans to roll out a central bank digital currency, China’s government and state-owned banks don’t have the innovative chops to build the future financial systems its vast and digitally-savvy populace craves. Alibaba shares closed 6.4% higher in Hong Kong Thursday, after climbing as much as 8.3% following reports of Xi’s support for the sector.
If the 2009 global crisis taught us anything, it’s that the flow of funds through the financial system is as important as how much money sits within it. When credit started drying up, the world economy ground to a stop. That explains why China’s current monetary policy is one of easing while other major economies are tightening. With inflation and oil prices climbing, Covid lockdowns hitting manufacturing and logistics, and Russia’s invasion of Ukraine dragging out the uncertainty, any halt to the flow of money through China’s financial system will imperil Xi’s economic targets.
That doesn’t mean a fintech free-for-all, though. Xi called for efforts to ensure the security of payment and financial infrastructure, and guard against and defuse potential systemic financial risks, Xinhua reported. Among the concerns is that these conglomerates are getting too big to fail, or manage, and have an unfair advantage when it comes to collation and analysis of data. Such a structure starts to look monopolistic, and heightens fears of systemic risk.
The fintechs need to play their part, too. This week, Reuters reported that Ant and Alibaba are working to disentangle from each other, including rolling back previous collaborations, restricting access to each other’s services, and even striking alliances with rivals. Such unraveling probably should have started a few years ago, before Ant even prepared to list, but it’s better late than never.
Next up is Ant’s plan to apply for a license to become a financial holding company, as Bloomberg News reported this week. The approval process could take months, but if it goes ahead the business would operate under the supervision of the central bank, just like bricks-and-mortar banks. Its stock-listing plans would likely resume from there.
None of this can come too soon. If China is to navigate its way through the coming period of economic malaise while decoupling from the West, it’ll need to be nimble and use all the resources it can muster. Its innovative and entrepreneurial fintech businesses will be an important tool to make that happen.
Bloomberg
