In late 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 $34.5bn, eclipsing the $29.4bn IPO record set by Saudi Aramco, to value it at $313bn and make it the most valuable fintech in the world, with a market capitalisation greater than the likes of Citibank.
Ant Group’s IPO was cancelled, and until last week no signs of renewed activity appeared likely until it was announced that Jack Ma would cede control of the company. Over the past two years, the Chinese fintech sector, and its technology sector more broadly, has been head-butting with regulatory authorities who look to centralise control, as opposed to the decentralisation and democratisation that the sector has inevitably pursued.
China’s deposit regulations predate emergence of fintechs
However, events since April 2022 may cause the Chinese government’s policy toward fintech and digital challengers to change in order to prevent the collapse of the entire banking system.
Historically, local Chinese banks have only been permitted to obtain deposits from their home customer base, though since the emergence 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 uncontrolled fintech sector that could increase risks in the wider financial and social system.
The war on fintech
Specifically, it was concerned with the rise in deposits for high rates of return, which saw said deposits invested or lent to high-risk customers, akin to peer-to-peer lending activity that has most recently been cracked down on in Indonesia.
Since 2021, and after the suspension of the Ant Group IPO that initiated the war on fintech in China, the Chinese government has investigated and frozen assets in banks across the country who have violated deposit-taking regulations.
In April this year, the focus of the government fell on banks in the Henan and Anhui regions, where savings products were pitched to customers via online technology platforms affiliated with 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 were frozen, with customers having no access to their funds for close to 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, posing serious questions about bank liquidity in the aftermath of large, and growing, Covid-19-related bad debts.
As it became clear that banks would not be honouring the pledges made to return access to customer funds, depositors began to protest. Over 1,000 depositors gathered outside the Zhengzhou branch of the country’s central bank on July 10 to launch their largest protest yet.
Chinese authorities reacted, 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 in the branch are “investment products” and cannot be withdrawn. Savers allege 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.
While the clashes seen in Henan and Anhui are localised, fears of widespread contagion that would undermine the country’s entire banking system have put the government on high alert. Despite its control of media, telecommunications, and social media platforms, news of the clashes has spread across China, and a run-on-the-banks scenario is feared if customers lose trust in their financial system.
Approximately one quarter of the banking industry’s total assets is held by 4,000 small lenders, who are engaged in partnerships with fintech providers and would be open to investigation and action by the government.
Given that many of these small and medium-sized village banks have opaque ownership and governance structures and are more vulnerable to fraud, localised corruption, and the sharp economic slowdown that is becoming a concern, the government must find a solution to this problem that does not involve locking down people’s money.
Given the current economic position China finds itself in—with slowing growth, mounting debt, and geopolitical tensions heightened—this is yet another challenge that the CCP could do without in the run up to the 20th party congress later this year that is intended to highlight the stability of the political and economic system.
Government 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 collaborating with them as opposed to vilifying them. Reforms intended to centralise control of fintech companies will have to be made long-term aims as opposed to short-term measures, and confrontation with said companies and business leaders will have to decrease if China hopes to reignite its economic growth and fortunes in the industries of the future.
This process is clearly already underway, as in June 2022 Chinese President Xi Jinping chaired a summit promoting the “healthy” development of the payment and fintech sectors, a sign that the broad crackdown on tech companies such as Ant Group may be easing.
As China and the global economy face high inflation and the prospects of a prolonged recessionary period, the reversal of the policy that has made Chinese technology ‘uninvestable’ would send a powerful signal as to the state’s support for the industry.