China Is Strangling Its Private Champions
(Bloomberg Opinion) -- Chinese electronic-payment providers like Alipay are just the type of innovative, technology-driven, consumer-focused enterprises Beijing wants to nurture. New regulations on almost $200 billion of their deposits will do just the opposite.
In the name of risk management, the People’s Bank of China in January officially became the custodian of all deposits from third-party payment groups, a transition that started in 2017. Before then, the likes of Ant Financial’s Alipay and Tencent Holdings Ltd.’s WeChat Pay had piles of cash accumulating on their platforms, which they’d invest to generate returns – without always paying interest to users. That didn’t sit well with the central bank and spurred regulation requiring the money to move into non-interest-bearing accounts under its purview.
While the PBOC voiced concerns that some customers weren’t earning interest, in practice Ant Financial offered deposit rates as high as 4 percent. That’s well above average demand-deposit rates at state-run banks of around 0.3 percent.
These deposits effectively have become subsidies to the PBOC and the banks whose debt they buy. For all the rhetoric about supporting private enterprise, the move looks like a state power grab.
Chinese electronic-payment providers are a true homegrown success story. Alibaba Group Holding Ltd. created Alipay in 2004 to handle online payments for its e-commerce platform, Taobao. In fact, Alipay originally acted as an escrow service for buyers and sellers, who were still developing trust in the rapidly growing internet business founded by Jack Ma. The service gained its license to operate six years later. Its chief competitor, WeChat Pay, also grew up in this era.
Alibaba and Tencent worked hard to build consumers’ confidence in their services and payment capabilities. Unlike state-owned banks that have a captive deposit base and political mandate to support other centrally controlled companies, Alipay and WeChat Pay had to cultivate users from scratch. Their success reflects an ability to tap into shoppers’ wants and needs; but also the fact that both made it cheap and easy for businesses to operate. Commissions on transactions, for instance, could be less than 1 percent, and payments within the platform are typically free.
By incentivizing consumers to leave money in their accounts, Alipay and WeChat Pay got their hands on deposits, which they put in money markets to earn low-risk, liquid returns. Eventually, however, these payment providers began to branch into consumer and business lending. Ant Financial alone serves roughly half of all small and medium-size enterprises in China, where it boasts its so-called 310 program: a three-minute application, one-minute approval and zero human interaction.
If Beijing is really concerned about protecting customers, there are easier ways to go about it that wouldn’t stifle innovation. For example, the China Banking and Insurance Regulatory Commission could require third-party payment platforms to demonstrate their ability to appropriately monitor accounts, similar to traditional financial institutions. It could even compel them to pay deposit insurance or hold reserves, or mandate deposit interest rates.
So why has the central bank chosen this route?
The PBOC is essentially a sister company to large state banks; it also lends money to China’s sovereign wealth fund, which owns a large share in those banks. So when these lenders complained loudly about third-party providers taking their deposits, the central bank listened. By taking control of these funds, and not paying interest, the PBOC now enjoys a big subsidy that it can lend out, or use to purchase bank assets in the repo market and keep interest rates lower.
With deposit growth lagging loan expansion in 2018, major Chinese banks are clearly under pressure. Neither Ant Financial nor Tencent have the resources of a state-owned company. But they’ve produced better products, focused on consumers and out-hustled the incumbents. They certainly won’t be able to afford to pay clients 4 percent interest anymore.
Despite claims of market neutrality, the PBOC is taking money from the pockets of Chinese consumers and private enterprises to subsidize SOEs.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Christopher Balding is a former associate professor of business and economics at the HSBC Business School in Shenzhen and author of "Sovereign Wealth Funds: The New Intersection of Money and Power."
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