China Banking Research

China’s fintech sector was never the same after November 3, 2020. That was the day Chinese regulators abruptly nixed Ant Group’s mega IPO, a dual Shanghai and Hong Kong listing that was expected to raise US$37 billion and value the Chinese fintech giant at a whopping US$315 billion. The cancellation of Ant’s IPO proved to be the beginning of an extended campaign to curb the dominance of Big Tech in China’s financial services industry.

Given the ever-more complex geopolitical situation, it is well worth examining the state of renminbi internationalization. Lofty goals mooted in the early 2010s, such as a free float of the Chinese currency, and full convertibility of the capital account, seem out of reach for the foreseeable future. Nor is the renminbi becoming a dominant global reserve currency. Rather, its use is rising in specific use cases, such as bilateral trade settlement, often due to geopolitical considerations.

In the past three years, Hong Kong has faced unprecedented challenges that have brought into question its future as a financial center. Strict adherence to a zero-Covid policy has been particularly impactful. The inability of businesspeople to freely travel to and from Hong Kong has adversely affected the city’s business environment. Still, in certain respects, Hong Kong is continuing to thrive as a financial center.

China has been cracking down on fintech in one form or another since September 2017 when it set out to clip the wings of its then flourishing cryptocurrency industry. Next up on the chopping block was peer-to-peer (P2P) lending. Both industries are shells of their former selves, which suits Beijing just fine given their risk profiles. However, the crackdown on China’s systemically important tech companies has had ripple effects in the broader economy and China’s leadership recently signaled that a change of direction may be near.

Internationalization of the renminbi has taken a different path than what seemed likely when the process began in the early 2010s. At the time, many observers expected China would gradually open its capital account and allow its currency to float freely. These steps were seen as integral for China to achieve a commensurate status in the international financial system that it already enjoys in the global economy. Yet political considerations have increasingly outweighed financial ones, and renminbi internationalization is instead evolving inside a less open ecosystem than expected.

Regulatory uncertainty and travel restrictions are forcing many of Hong Kong’s blockchain and crypto companies to shift their operations to more hospitable jurisdictions including finance-focused island-states Singapore, Gibraltar and Cyprus and technologically empowered innovation hubs including Israel, San Francisco and London. Crypto.com, the world’s third-largest spot exchange by 24-hour trading volume, shifted its headquarters last year from Hong Kong to Singapore.

All good things come to an end, and sometimes the end is long and drawn out. Such is the state of the latest fintech crackdown in China, which has evolved into an all-out effort to reign in Big Tech/platform companies. The tightening of supervision over firms like Ant Group and Tencent represents a major escalation over prior regulatory campaigns, which focused on cryptocurrency and peer-to-peer (P2P) lending. This time, Beijing is keen to clip the wings of the firms that have come to dominate its once-booming fintech sector. Not all of them are equally affected though.

China is currently the world’s largest emitter of greenhouse gases, accounting for nearly 1/3 of the global total. Beijing is well aware of the effect its emissions have on climate change and has pledged to be carbon neutral by 2060, with emissions peaking in 2030. As part of its emissions reduction plan, China is introducing more eco-friendly practices in the financial services sector, but there is a steep learning curve.

It has been an eventful seven months for Ant Group, with more downs than ups. Ever since the suspension of its anticipated blockbuster IPO in November 2020, the fintech giant has been trying to satisfy a long list of regulatory demands to restructure its operations. Regulators have been especially concerned with what they perceive as a highly risky (and previously, lucrative) consumer lending business. With that in mind, Ant gaining approval to operate its new consumer lending unit Chongqing Ant Consumer Finance within six months is an important step in the right direction.

Fintech crackdowns in China tend to snowball. That was the lesson learned when Beijing began culling crypto and P2P lending firms. At first, it seemed those industry segments might survive if they could assuage regulators. It later became clear that the only way to satisfy regulators was to shut down or move into another line of business, as erstwhile P2P juggernaut Lufax did. China's fintech giants, once seemingly unassailable, now face their own day of reckoning with regulators. Ant Group and its counterparts are probably too big to fail. But they are not too big to be cut down to size.

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