Commentary on Political Economy

Tuesday 10 November 2020

THE FT AGREES WITH US - but we said it first


Ant posed threat to China’s centralised control

The right time to pull the plug on Ant’s share bonanza would have been long before investors signed up for the world’s biggest IPO © Alex Plavevski/EPA-EFE/Shutterstock

Much of the coverage of China’s decision to suspend Ant Group’s $37bn share offering last week has focused on a personal clash between Jack Ma, Ant’s founder, and the Beijing authorities. That is understandable. Mr Ma is a Chinese celebrity entrepreneur who commands global recognition, and one of the world’s wealthiest people.

But longer lasting implications from the Ant fiasco may come in the less eye-catching area of fintech regulation. In this field, China’s battles may be instructive to the wider world because its financial technology companies — such as Ant, Tencent’s WeBank and the US-listed Lufax — rank among industry leaders both in terms of size and technological prowess.

China is taking steps to embrace a multi-faceted fintech future. The People’s Bank of China, the central bank, has completed technical preparations for the launch of a digital renminbi, the Chinese currency, and has started to run a series of trial programmes in cities. It also has plans to build a “digital central bank” that would oversee a fintech platform powered by big data to improve risk management.

The attractiveness of this vision is clear. Digital currencies may, in theory at least, be easier to trace than their physical counterparts, improving Beijing’s ability to combat corruption. Big data can also help to reduce lending risks and cut red tape. Algorithms that draw on a wealth of personal data — salaries, debt levels, spending habits and various psychometric insights — provide personalised interest rates on loans that are obtained at the tap of a smartphone’s screen.

But from Beijing’s perspective, a fintech future conceals one big risk: authorities may have to surrender too much control, both to the algorithms and to the companies, such as Ant. As one Chinese state banker told the Financial Times after the Ant IPO suspension last week, the attitude of China’s regulators is simple: “If I don’t understand you and can’t control you, I won’t let you grow”.

Mr Ma’s clash with regulators reveals such tensions in microcosm. Finance in China has always been regarded as far too important to be left to the private sector. Xi Jinping, China’s authoritarian leader, made clear in 2017 that financial stability was so critical that it should be regarded as an aspect of national security.

So a big part of what spooks Beijing about Ant and its counterparts is the threat they pose to centralised control. It is easy to see why. Ant’s lending business has some 500m customers and a big chunk of personal borrowing in China these days comes from online platforms. The sector’s boom has also drawn thousands of start-ups, creating a regulatory headache.

China has painful memories of recent financial manias. After a peer-to-peer lending boom spiralled out of control, Beijing launched a crackdown in 2016 that whittled down the number of surviving P2P lenders from around 6,000 to a current 29. Nevertheless, P2P lenders still owe their depositors some $115bn and Beijing is still trying to recover the funds.

It is easy to sympathise with Beijing’s concerns. Devolving influence to private companies animated by opaque algorithms is hard for any regulator to do. Yet equally, China needs to be more transparent at an earlier stage about its regulatory processes. The right time to pull the plug on Ant’s share bonanza would have been long before investors signed up for the world’s biggest IPO. The reputation of China’s capital markets has been badly damaged by an episode that was entirely avoidable if regulators had made their concerns clearer at an earlier stage.

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