The need to ease control over the fintech sector in China

At the end of 2020, the Chinese government shocked financial markets when it suspended the most anticipated IPO of the year. Jack Ma’s Ant Group had until then raised $34.5 billion, surpassing the IPO record of $29.4 billion set by Saudi Aramco, to value it at $313 billion and make it the most valuable fintech in the world, with a market value that is greater than the likes of Citibank.

Ant Group’s IPO was cancelled, and until last week there was no sign of renewed activity until it was announced that Jack Ma would relinquish control of the company. Over the past two years, the Chinese fintech sector, and its technology sector more broadly, has been at odds with regulatory authorities looking to centralize control, as opposed to the decentralization and democratization that the sector has inevitably followed.

China’s deposit regulations predate the rise of fintechs

However, events since April 2022 may cause the Chinese government’s policy towards fintech and digital challengers to change to prevent the collapse of the entire banking system.

Historically, local Chinese banks have only been allowed to receive deposits from their domestic customer base, but since the rise of fintech and digital financial service providers, it has become common for small banks to partner with online platforms and attract funds from across the country.

By partnering with online platforms, smaller banks have been able to offer better rates and rewards for customers as well as easier channel access, among other benefits.

In early 2021, the Chinese government issued a ban on banks selling deposit products via online platforms, fearing the rapid expansion of the largely unregulated and unsupervised fintech sector could increase risks in the wider financial and social system.

The war on fintech

In particular, it was concerned about the increase in high-yield deposits, which led to deposits being invested or lent to high-risk customers, similar to peer-to-peer lending activity that has recently been clamped down in Indonesia.

Since 2021, and following the suspension of the Ant Group IPO that started the war on fintech in China, the Chinese government has been investigating and freezing assets in banks across the country that have violated deposit regulations.

In April this year, the government’s focus fell on banks in the Henan and Anhui regions, where savings products were presented to customers via online technology platforms linked to the likes of Baidu and JD.com, two of the largest technology companies in China. .

Deposits remain frozen

Since April, as many as 400,000 customer deposit accounts have been frozen, and customers have not been able to access their money for nearly three months. Despite promises that depositors in Henan villages would regain access to their frozen funds in stages, the first due on July 15, only a handful of depositors received payments, raising serious questions about bank liquidity in the wake of large and growing Covid -19 -related losses on receivables.

When it became clear that the banks would not honor the promises made to return access to customer funds, depositors began to protest. More than 1,000 depositors gathered outside the Zhengzhou branch of the country’s central bank on July 10 to launch their biggest protest yet.

Chinese authorities responded, rolling out tanks to protect the banks and prevent locals from reaching them, following an announcement by the Henan branch of the Bank of China that the savings of depositors at the branch are “investment products” and cannot be withdrawn. Savers claim they were told by the banks that the deposit products were legal and that they were protected by the standard deposit insurance scheme that all banks are part of.

Henan clash

While the clashes seen in Henan and Anhui are localized, fears of widespread contagion that would undermine the country’s entire banking system have put the government on high alert. Despite its control over media, telecommunications and social media platforms, news of the clashes has spread across China, with fears of a run-on-the-banks scenario if customers lose confidence in their financial system.

About a quarter of the banking industry’s total assets are held by 4,000 small lenders, which are engaged in partnerships with fintech providers and will be open to investigation and action by the authorities.

Given that many of these small and medium-sized village banks have opaque ownership and governance structures and are more vulnerable to fraud, localized corruption and the sharp economic downturn that is becoming a concern, the government needs to find a solution to this problem that makes not involve locking up people’s money.

Given China’s current economic position – with slowing growth, rising debt and heightened geopolitical tensions – this is another challenge the CCP can do without in the run-up to the 20th Party Congress later this year, which is meant to highlight the stability of the political and economic system.

The government’s U-turn forecast

Due to the scale of the challenge, it is likely that the Chinese government will have to reverse its antagonistic policy towards fintech and technology companies in China, embracing and working with them as opposed to vilifying them. Reforms intended to centralize control of fintech companies will need to be made long-term goals as opposed to short-term measures, and confrontation with said companies and business leaders will need to be reduced if China hopes to revive its economic growth and fortunes in the industry. of the future.

This process is clearly already underway, as Chinese President Xi Jinping in June 2022 chaired a summit promoting the “healthy” development of the payments and fintech sectors, a sign that the broad attack on tech companies such as Ant Group may be easing.

As China and the global economy face high inflation and the prospect of a prolonged period of recession, the reversal of policies that have made Chinese technology “uninvestable” will send a powerful signal of government support for the industry.