Earlier this month, the Chinese tech tycoon, Jack Ma, made his first public appearance ever since the suspension of Ant Group’s $37 billion IPO in November. Ant is an affiliate company of Alibaba, the e-commerce giant that he co-founded. The crackdown on Ant followed Jack Ma’s comments in late October during a public event in Shanghai. He had then criticised Chinese regulators for harbouring a “pawnshop mentality,” focusing on pledges and collaterals when it came to finance.
According to the Wall Street Journal’s reportage, this was the last straw in the battle between the regulators and Jack Ma, with President Xi Jinping personally engaged in greenlighting regulations that would scuttle Ant’s plans. The politics of personalities, of course, is a key component of all of this. However, viewing the developments with regard to Ant simply through such a prism or as an issue of Jack Ma being tamed after he had become too big for his boots is missing the woods for the trees.
Ant Group’s case lies at the intersection of the changes that are taking place in the Chinese Party-State’s approach to the financial and technology sectors. Essentially, these are about expanding the State’s authority over private entities to meet the challenges of stability and direct capital towards strategic imperatives. This approach is captured in official statements that talk about “preventing capital from expanding in a disorderly fashion,” something that was among the eight priorities identified after December’s Central Economic Work Conference.
As far back as 2017, Xi had listed “preventing financial risks” as one of the “three tough battles” that the party must prioritise. Given the expanding size of the fintech sector, stricter regulations shouldn’t really come as a surprise. Ant, of course, is the leader in this space. It operates Alipay, a payments app with more than 1.3 billion users. An overwhelming majority of these come from China, with others coming via e-wallet partnerships in other countries, including India. Over the years, Alipay has expanded the scope of its services to include online shopping along with linking to a suite of wealth management products and lending services. As part of the latter, it connects banks to small firms and individuals.
According to estimates, Ant has facilitated loans to more than 20 million small businesses and hundreds of millions of individuals. The risk in all of this is largely borne by banks, while Ant earns a transaction fee. For instance, Ant reportedly funds merely two per cent of its consumer loans, estimated at $257 billion.
This expansion into multiple business streams, the ability to then pick and choose winners, and lack of risk-sharing are what regulators are currently targeting through anti-monopoly rules by placing greater capital requirements for firms engaged in microlending. Ant’s case may have been the trigger, but the changes have sector-wide implications. These are likely to continue to evolve further as the People’s Bank of China, the country’s central bank, operationalises its new digital currency.
Reigning in the fintech sector, however, is just one aspect of the sweeping changes taking place across the technology ecosystem in China. There is a slew of regulatory shifts that have either been proposed recently or are being debated. These touch upon areas ranging from data protection and privacy, anti-monopoly, news and content moderation, the scope of internet services and responsibilities of service providers, and taxation of the digital economy.
Of course, there are multiple objectives that these changes are seeking to meet, including keeping pace with technological advancement and addressing consumer concerns. But the fundamental principle underlying them is to rebalance the power dynamic between the State and technology firms in favour of the former.
The primary driver to do so is the increasing acknowledgement of the strategic role of innovation in powering future growth along with the vision of the State’s role in guiding the markets to ensure this. This was underscored in the communique issued after the Fifth Plenary session in late October, as it was in the statement issued at the end of the Central Economic Work Conference. The latter was categorical. It listed “national strategic scientific and technological strength” as the top priority, and called for a “new nationwide system” that must give “full play to the role of the state as the organizer of major scientific and technological innovation.”
This statist vision of the future is very different from the government creating a level-playing field for private capital to compete and the market to do its job. It is about the State guiding capital and private entities towards what it believes are national strategic priorities, rather than allowing them to simply focus on generating greater revenue. These priorities include expanding research and making breakthroughs in core technologies. This, Beijing hopes, will reduce China’s dependence on the West, easing the threat of coercion. At the same time, the regulatory innovation that it is attempting will likely bolster China’s capacity to shape global technology governance norms and standards.
Manoj Kewalramani is fellow, China Studies at the Takshashila Institution
The views expressed are personal