Earlier, we looked at what China’s new digital yuan, also called Digital Currency Electronics Payment or e-CNY, will mean for Chinese citizens. The rollout may relate to billionaire e-commerce founder Jack Ma’s critiques of China’s regulators and subsequent (temporary) disappearance. Also to the subsequent denial of his Ant Group’s billion-dollar initial public offering on the Shanghai index. Since then, the Chinese government has cracked down on several Big Tech companies while promoting the digital yuan.
How China is rapidly reining in its Big Tech industries
Chinese media have been promoting the second annual Double Five (i.e., May 5) Shopping Festival in Shanghai. This month-long state-organized shopping festival is part of “National Consumption Promotion Month.” The first Consumption Month festival, held last year, is an effort stimulate China’s economy after Covid-19.
The festival centers around Shanghai’s massive Super Brand Mall. Last year was an opportunity for digital payment apps, such as Alipay and WeChat Pay, to reap the benefits of a high volume of transactions. The two apps, Alipay and WeChat Pay, account for over 90% of digital transactions, which comprise the majority of transactions. (Paying with a credit card is considered passé in China.)
According to Reuters, this year, six state banks are promoting the digital yuan ahead of the shopping festival. Publicly, the People’s Bank of China assures consumers that e-CNY works with AliPay and WeChat Pay, serving as a “backup” or “redundancy” rather than a competing payment option. But privately, the state banks hope to undercut the two fintech companyies’ dominance in China. According to one banking official:
“Big data is wealth. Whoever owns data thrives… WeChat Pay and Alipay own an ocean of data,” so the e-CNY rollout facilitates China’s anti-trust campaign and helps the government control big data, he added.“Analysis: China Digital Currency Trials Show Threat to Alipay, WeChat Duopoly” at Reuters (April 25, 2021)
As noted above, last November, Ant Group was denied its billion-dollar initial public offering on the Shanghai STAR Market and Alibaba Group Holdings was fined $2.8 billion for anticompetitive behavior, a record for the country.
The Wall Street Journal reports that shortly afterward, dozens of companies are either under investigation or fined for not seeking antimonopoly clearance from China’s Antimonopoly Bureau, which is a part of the State Administration for Market Regulation. Many of China’s tech companies avoided regulators by registering in offshore tax havens but the laws changed so that online platforms must now obtain clearance from the Antimonopoly Bureau before registering offshore.
Last November, China also started investigating many online retail, streaming, and service providers for price discrimination based on user data, price inflation, price gouging, and fraud.
Now China’s central bank has ordered thirteen of the country’s biggest tech firms to restructure. Those firms include Tencent Holdings Ltd. (owner of WeChat), ByteDance Ltd. (owner of TikTok), Meituan (food delivery), Didi Chuxing Technology Co (ride sharing), and JD.com Inc. (e-commerce). According to the Journal,
The crackdown comes as China’s leaders make greater demands for its tech entrepreneurs to be aligned with the state’s goals and priorities. These internet giants—armed with troves of data, deep coffers and an influence that spans all aspects of Chinese life—have increasingly made them a national-security concern for Beijing.Lingling Wei and Stephanie Yang, “China Warns Large Tech Firms as Industry Faces Rising Oversight” at Wall Street Journal
From one perspective, China’s tech companies probably needed to be reined in for similar reasons that U.S. tech companies need to be reined in. Charging people different prices for the same product based on user analytics is unethical. Buying out competitors or forcing vendors to sell exclusively on the large e-commerce site is anti-competitive. Also, Ant Group served as a kind of intermediary between small businesses or individuals and the central bank, while assuming little risk.
However, as Nathaniel Taplin and Jacky Wong ask at the Wall Street Journal, “Is Beijing punishing China’s internet-technology titans because they are too large and too powerful or because tech firms are abusing their market power?”
The more problematic side of the regulatory crackdown is in fintech. It is logical to argue that firms like Ant originating large numbers of loans for banks should have to put up more of their own capital. It is less clear why consumer internet firms should now be forced to hand over enormous troves of consumer data to the government to help state banks… Ant and its peers have invested enormous amounts in collecting and analyzing that data: strong-arming them to give it away looks confiscatory and could damp incentives for future internet entrepreneurs.Nathaniel Taplin and Jacky Wong, “Profits and Politics in China’s Tech Crackdown” at Wall Street Journal (April 4, 2021)
Will Big Tech wind up working directly for Big Government?
Later in the series, we will look at the similarities and differences between Washington’s and Beijing’s crackdowns on Big Tech. For now, note two important differences. First, Chinese companies have no recourse if accused of violating laws, even when the government applies new antitrust laws retroactively. Secondly, Chinese tech companies must work with the Chinese Communist Party.
This means that Ant Group and Tencent are working with China’s Central Bank to roll out its digital currency, even though the digital currency will undercut these companies profits from Alipay and WeChat Pay. Part of the deal is that Ant Group will turn over its data to the government in exchange for the government easing its strict regulations.
VOA News talked to Jerry Lin, director of the Financial Research Institute at the Taiwan Academy of Banking and Finance in Taipei: “Lin said that, in the short to medium term, it will also be in the fintech firms’ interests to trade some of their shares in China’s e-payment market in exchange for the regulator’s lenient treatment of their online microlending, personal financial management and insurance operations, which generate higher profits.”
However, Lin added that, in the long run, the Chinese government will probably try to nationalize the country’s financial services, giving the government control over all transactions, credit scores, and savings.
You may also wish to read: Why China is making a bold gamble with digital currency. An all-digital currency based in the People’s Central Bank, gives the government unprecedented power over all transactions using currency. “Controllable anonymity” means that all transactions between individuals are visible to the People’s Bank and trackable by the Chinese government. (Heather Zeiger)