Under a strict roadmap from the People’s Bank of China, Alibaba-affiliated Ant Group must transform its business into a separate holding company. This so that the Chinese regulators can continue to control the company and adapt it to the country’s financial regulations. The Ant Group must transfer any entity it owns that requires a financial license to operate in that holding company. It could ultimately be managed like a traditional bank. Some of the transfers include wealth management services, consumer credit, insurance, payments, and MYbank. What is on the horizon and permitted by the nature of a holding company (which replaces the private shareholder with a legal entity shareholder) is a possible future takeover by a public entity. In other words, increasing government influence over the Ant Group.
Jack Ma’s company is now a fintech giant in China. Within this “group” there are several subsidiaries for digital payment services and tools. Alipay is the most famous with its mobile wallet that allows you to pay or be paid for easily by smartphone. You can buy almost anything with it, and even foreign tourists have had access to it recently. By June 2020, the subsidiary had 711 million active users per month and around 80 million merchants using its network, fueling around 120,000 transactions per second. In short, a giant. The user group and the substantial income explain the influence of the regulatory authorities. For China, a lack of influence does not go well with the party’s political projects.
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The reasons for such intransigence on the part of FinTech on the part of the country are many. Even if political sanity wins, this is not the only thing that matters. First, the financial practices related to the services offered by the Ant Group, particularly microcredit, are described as risky to the country’s financial stability. . In fact, the group funded only 2% of the value of the loans it distributed through its numerous subsidiaries, with the remainder coming from banks or other companies that carried all the risks of the loan granted on their shoulders. Practices that are, to a lesser extent, reminiscent of the US subprime crisis and highlight the extent and potential impact of the FinTech sector on the Chinese economy. Given China’s private debt of 200% of GDP, a crisis would be undesirable.
In order to overcome these discrepancies, the state wanted to demonstrate its position to the powerful and influential conglomerates that would overshadow it, but without undermining innovation and entrepreneurship, which would not undermine the economy needs. Maintain the Ant Group, but limit it, that is the credo. A difficult acrobatics given the public digital currency projects that require review of the entire payment ecosystem. The size and impact of Ant Group’s activities also worries authorities given the country’s financial standardization projects they are building with the digital yuan. In this flange of the financial technology sector one can see the shadow of the supposed ambitions of the Middle Kingdom.
China has been working on its own digital currency, the DCEP (Electronic payment in digital currency), colloquially known as the digital yuan. The digital yuan was designed and developed to compete with private digital currencies such as Bitcoin or Libra (renamed Diem). It is more rooted in China’s desire for multiple domination. This supremacy sought by the country is diplomatic, but also financial, with the hope that the DCEP can sign it End of the current US dollar dominance in international trade and disrupt the global payments market.
In its current form, the Chinese digital currency is a perfect replacement for coins and banknotes and will tend to replace them entirely in the long run. The issuing and circulation system is two-tiered: The Bank of China issues the DCEP and issues it to commercial banks, which in turn dispense the money intended for individuals in the form of a digital wallet that can be accessed through an application. Mobile phone authorized by the Central Bank of China. Without blockchain, the design of China’s DCEP has been widely criticized for the control that such technology would give the government over data related to people’s payments. Such a tool, known for using technology to spy on its people, especially minorities and ideologically-minded dissidents, would give authorities even more leverage over the fabric of society. In November the China Daily reported details of the People’s Bank of China’s plan to keep transactions in a central ledger.
Currently, we know of the practicalities of the digital yuan, that it can be used from a wallet without an internet connection and linked to a phone number. Tests were also conducted in many Chinese cities, including Shenzhen and Suzhou, where huge lotteries allowed some candidates to get prizes in digital yuan. This allowed the population groups to get used to it and were initially reluctant to use a new form of digital payments when Alipay or WeChat Pay already allowed it, but also to study consumer behavior. A way of researching and shaping the economic and financial ecosystem, using tricks, recruiting allies, and making small strides. In early November, Chinese company Huawei announced that its new phone, the Mate 40, will offer payment in digital yuan, which is compatible with Huawei’s digital wallet and Huawei Pay application. The steadily increasing number of partners joining the central bank in its digital yuan project clearly shows the party’s pressure and ambitions. Behind the persecution of the group of ants hides the line of a communist party and its totalizing character, its surveillance, its ambitions and its contradictions.
Tensions between the Chinese government and private companies are deep and complex. In addition, they are often well hidden when an impervious administration is not communicating. Since taking office in 2013, President Xi Jinping has targeted entrepreneurs heavily, particularly those investing overseas. Various high-profile executives have been jailed or have disappeared. Recently, the government has urged private companies to set up party committees to ensure that their business decisions remain in line with government policies.
Driven by its goals, China is grappling with the pressures of burgeoning free market capitalism and a banking and regulatory system controlled by the Communist Party. What the restructuring of the Ant Group shows is also the confirmation of a capitalism-communism that is unique for China and the intertwining of globalization and a strong ideological line. Experts who had predicted a democratization of the country under the effects of market forces would have been deceived. The country has a long list of groups, companies, organizations, and people considered threatening and excluded by the government. In addition, the Ant Group is by no means the only company targeted by regulators. Other companies are also monitored, including WeChat, Tencent’s Messaging or the rideshare company Didi Chuxing. The giant Alibaba, the Ant Group’s holding company, is itself the subject of an antitrust investigation in China. All of this underscores the country’s desire to introduce new regulations for its technological giants between economic interests and political and ideological interests.
In the long run, and knowing that the goal is to bring the digital yuan into every layer of the economy, you can think of a private sector to match that or something breaks. Given a digital currency that is cash equivalent and designed to be interoperable, it remains to be seen how the authorities and the FinTech sector can combine their interests.