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A nation must think before it acts.
To get rich may be glorious, but it can also be perilous, particularly if your business model clashes with Beijing’s agenda.
The 11th hour suspension of Ant Group’s initial public offering (IPO) in early November has been portrayed as an example of the Chinese government’s determination to enforce its supremacy. But Ant’s case was particularly fraught. Its IPO was vaunted as the biggest ever, poised to raise $32 billion. Ant’s digital payments service has become deeply important to the Chinese economy. Its business model clashes with two key Beijing priorities: concern over the country’s ballooning private debt, and more importantly, its plan to launch a digital currency—the e-yuan, as it has come to be called—that can help internationalize the renminbi and establish it as a premier reserve currency, and perhaps even rival the dollar as the world’s chief currency.
The dustup highlights the chasm in China between booming free market capitalism and a party-controlled banking and regulatory system, which has become uncomfortable with Ant. China’s government has a long history of trampling groups that threaten the government’s power, whether it’s a religion, political organization, or business that doesn’t show sufficient fealty.
Ant’s controlling shareholder, Jack Ma, is already China’s richest person. A groundswell of average citizens eager to ride in Ma’s slipstream made the IPO wildly over-subscribed, and aligned millions of families’ financial prospects with Ant’s future success. Beijing interprets this quasi-allegiance to capitalism and the type of runaway success that Ma embodies as a dangerous alternative worldview and direct threat to the state, and it has acted decisively to demonstrate that subscribing to it can bring grave consequences. The list of rich Chinese and powerful executives who have been arrested, imprisoned, or worse is long. In Ant’s case, “by firing a last minute torpedo” at what would have been the world’s most lucrative initial stock offering, “the authorities made clear that international bragging rights mattered less than ensuring private companies know where they stand next to the state,” as the New York Times wrote.
In late October, Ma uncharacteristically lashed out in a speech, saying capital requirements were outdated and that China lacked a true “financial ecosystem.” He likened Chinese banks to “pawn shops” for requiring loan collateral and implied that they underserved smaller, younger borrowers. The comments clearly didn’t help Ant’s case, nor should they have been expected to. Financial stability is at the core of the Communist Party’s legitimacy.
When it comes to private business, the tensions between the Chinese government and private businesses run deep. Since taking the helm in 2013, Xi Jinping has targeted entrepreneurs investing overseas; various high-profile executives have been imprisoned or have vanished. Recently, the government has been pushing private firms to establish party committees to ensure that business decisions are in line with government policy. The government-business tensions are by no means new. For decades in the developing world, an expatriate merchant class—numbering over a million in Africa—has operated restaurants, casinos, import brokerages, and the like. These individuals have often suffered when Beijing-backed investments arrive. The merchant class is easily overshadowed by government-sponsored newcomers.
Ant’s business model raised red flags in Beijing for two reasons. First, Ant’s profits have been increasingly tied to consumer debt that is both rising and loosely regulated given Ant’s status as a fintech company, not a bank. Ant has aggressively expanded into offering loans, credit, investments, and insurance to hundreds of millions of consumers and small businesses. This has spurred concerns over high debt levels. It has also prompted jealousy in a wider banking system geared more toward supporting state policy and large corporations.
Just days before the IPO and a week after Ma’s controversial speech, China imposed new minimum capital requirements and other restrictions to guard against “systemic risk.” (China’s private debt rates are among the world’s highest, at over 200% of gross domestic product.) The move plugged some of the regulatory gaps that Ant Group had stepped through. Analysts believe the regulations will “put a significant dent” in Ant’s future revenues.
The second red flag pertains to Ant’s widely used Alipay digital payments platform, which enables cashless transactions using smartphones, QR codes, and digital wallets. Alipay piques Beijing’s discomfort with alternative pillars of power, and clashes with its urgent ambition to launch the e-yuan. In addition to supporting China’s ambition to establish the yuan as a global currency, the central bank sees the e-yuan as a means of diminishing Alipay’s dominance in the Chinese economy.
Alipay can be used to purchase virtually anything in China, online or in person, including noodles, cars, and stocks. Alipay is the source of one-third of Ant’s revenues, and provides many terabytes of invaluable consumer data, the highly prized asset that fuels the digital economy. In June 2020, Alipay had 711 million monthly active users and about 80 million merchants using its network. In the previous 12 months, it had processed an astounding 118 trillion yuan (about $18 trillion) in transactions according to its prospectus. Ant collects a tiny commission on those transactions, smaller than that demanded by credit card companies, underpinning its popularity with merchants. At its peak on Single’s Day in November 2016, Alipay processed 120,000 transactions a second.
Alipay controls 54% of the market, and rival Tenpay controls 39%, giving the duopoly enormous commercial leverage in the digital payments market. China has advanced so far toward becoming a cashless society that even panhandlers—equipped with QR codes printed on paper—are accepting payments from passersby via the networks.
There is evidence that Alipay and Tenpay have been a topic of scrutiny in Beijing. To achieve their success, the two companies largely “elbowed aside” the traditional banking sector, which is comprised of state-owned behemoths. They have done so in part thanks to a lighter regulatory load on fintech firms, which sometimes conflicts with Beijing’s interests. For instance, until 2018, mobile payments were not required to flow through a clearing system visible to the central bank, making it more difficult for Beijing to investigate capital flows, money laundering, and fraud. On a more pragmatic level, the dominance of mobile payments led to concerns that if the networks went down—such as during a natural disaster, or perhaps political unrest—there would be insufficient paper cash to support commerce, leading to civil chaos.
As early as 2014, concerns over Alipay and Tenpay helped spark development of the e-yuan, which has the power to rein in private sector control of payments. Now, just as the central bank prepares for the digital currency’s imminent launch, Alipay has become one of the world’s most celebrated companies. Payments are essentially a zero-sum game: a successful e-yuan reduces Alipay and Tenpay’s dominance. Indeed, the e-yuan strikes at a key weakness of the duopoly: exclusivity. Alibaba, for instance, whose revenues are about three times that of Amazon’s, only accepts Alipay. JD.com, the world’s third largest e-retailer, accepts only Tenpay. While such arrangements helped fuel growth of the payment services, they are inconvenient for consumers who are forced to use different payments systems for different retailers.
In contrast, as a digital equivalent of cash, the e-yuan is designed for interoperability. A consumer could use the currency to make payments anywhere, and merchants could avoid paying transaction fees. In Alipay’s prospectus, both the e-yuan and payment-network interoperability are mentioned as factors that could adversely impact performance. Of course, the many small investors who sought Ant Group shares could not be expected to connect these dots.
In the near term, Alipay and Tenpay will continue benefiting from their massive market share and popular apps. But for how long will consumers shuffle cash through the two digital wallets when they can simply use the e-yuan which—as central-bank-issued cash—should be accepted everywhere? Moreover, Beijing is apparently taking other steps to erode the duopoly’s dominance. Last year, the central bank said it was seeking to make the systems more interoperable, and in Q2 of 2020, it reportedly recommended an antitrust probe into the digital payment companies.
These facts, along with the new regulations on Alipay’s microloans, could have led to a public relations dilemma for the Chinese government. A strong push for people to use the e-yuan could create resentment of the digital currency, particularly if the many investors betting their savings on Ant get burned. Considering the power Beijing wields over the sector—via the e-yuan, the government’s plans for interoperability, and any antitrust investigations—it could be argued that halting the IPO may have been the prudent thing to do, and in the best long-term interest of investors. Either way, it certainly was in the party’s interest.
The views expressed in this article are those of the authors alone and do not necessarily reflect the position of the Foreign Policy Research Institute, a non-partisan organization that seeks to publish well-argued, policy-oriented articles on American foreign policy and national security priorities.