China sends Alibaba reeling with a regulatory king hit

A visitor talks with an employee at the stand of Alibaba.com.cn during an exhibition in Shanghai, China, 6 November 2012. (AAP Newswire)

China’s fast growing internet finance industry has hit its first speed bump after the People’s Bank of China blocked efforts by Alibaba and Tencent to issue virtual credit cards linked to their online payment tools and settle payment using QR codes. 

E-commerce giant Alibaba, which is currently preparing for the largest listing in the US since Facebook, suffered another king hit when the Chinese central bank said on Monday it would set limits on the amount people can spend using smart phone payment services.  

Alipay, the company’s financing arm that enables consumers to settle payments and purchase goods online, is likely to suffer the most from the new regulation. Alipay enabled 12 billion transactions last year to the tune of 3.5 trillion yuan, and it is one of the largest third-party payment companies in the country, according to Caixin.

Big state-owned Chinese banks like the Industrial and Commercial Bank have already introduced restrictions on the amounts depositors can transfer into online finance products. The seemingly coordinated attack from the central bank and big state-owned banks against the privately controlled internet giants has sparked heated debate in China over the future of financial reform.

Jack Ma, the charismatic and outspoken Chairman of Alibaba, said with a sense of foreboding at a conference in Beijing: “Sometimes you are not defeated by technology, sometimes it is an official document.”

China’s central bank, which many regard as a reformist institution supportive of innovation in the finance industry, has become a target for attacks from a large number of third-party payment operators, many of whom are private companies.

So why did the central bank become hostile to a new breed of internet financiers -- especially in light of its early accommodative attitude?

To understand Beijing’s apparent change of heart, we must look at the explosive growth of internet finance products in the last year. Alibaba’s online internet product Yu’ebao (‘leftover treasure’), which offers a higher return than bank deposits, has managed to attract 81 million customers and more than a trillion yuan of deposits in nine months (Alibaba and the Chinese banking thieves, February 26).

If it continues to grow at the present rate, Yu’ebao is expected to suck in 1 trillion yuan ($180bn) by June this year, making it one of the largest money market funds in the world.

Though Yu’ebao is supervised by the Chinese banking regulator, the closely linked Alipay is largely allowed to operate in a regulatory grey area.

Alipay, which controls more than one third of China’s 10 trillion yuan online third-party payment systems, has over 300m active customers and sits on hundreds of billions in cash every day from customers who shop and pay bills online.

Alipay has become a concern to Chinese regulators who are worried about the risks its poses to the overall financial system, due to its sheer size. And the existing regulation is behind the fast pace of financial innovation in China.

A new generation of internet financers like Jack Ma emphasise customer experience and efficiency over stability and risk management. Ma has won over many long-suffering Chinese depositors who have endured years of neglect at the hands of Chinese banks.

However, the Chinese central bank is right to point about the explosive growth in internet finance products as a source of potential risk to the stability of the overall financial system, which is of paramount importance to any country.

At the same time, it cannot be denied that the rise of internet giants is putting enormous pressure on Chinese banks to reform and focus on their core business of serving their customers. Chinese state-owned banking giants are fighting back using whatever means possible, including exerting pressure from the central bank.

The clashes between Alibaba and the Chinese central bank should be seen as a healthy battle between disruptive innovation and the need to exercise prudential regulation over a fast growing industry.

ANZ Bank’s chief China economist Liu Li-Gang says that it’s “still too early to conclude whether the online financial products will bring about more risks to the whole financial system, and the Chinese authorities could adopt a ‘wait and see’ strategy and monitor its developments and impact closely”.

Follow Peter Cai on Twitter: @peteryuancai

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