One theory that has emerged from Beijing’s crackdown on Jack Ma and his business and fintech empire, is that China’s true intention in bringing China’s richest man to heel was not so much the public humiliation in what has been widely seen as a giant clash of egos between Xi Jinping and Jack Ma, as the ability to peek inside the financial records of China’s biggest private financial company.
Why? Two reason: i) China is a command economy and it needs to have discrete knowledge where every last yuan in new loans ends up and ii) China’s financial system is more than double the size of the US, which is why any gray zones in the financial sector which the PBOC is not aware of could have devastating consequences should a bad debt cascade begin without the central bank being aware.
We bring all this up because in support of the first theory, Reuters today reported that China plans to push tech giants such as Jack Ma’s Ant Group, but also Tencent and JD.com to share consumer loan data to prevent excess borrowing and fraud, in Beijing’s latest tightening of scrutiny. Additionally, Chinese regulators, including the central bank, the People’s Bank of China plan to instruct internet platforms to feed their vast loan data to some of the nationwide credit agencies.
The plan, if implemented, would effectively end the government’s “laissez-faire approach” to the industry and represent a de facto soft nationalization, as well as another sign of attempts to rein in the country’s technology champions.
Naturally, giant internet platforms have strongly resisted handing over their data, a crucial asset that helps them run operations, manage risk and lure new customers. However, in light of the crackdown on Jack Ma, they have no choice, as any continued resistance could cast them in the same unwelcome light as Jack “Uncle Horse” Ma.
According to the report the agencies, which include the PBOC’s Credit Reference Center, China’s main, centralized credit scoring system, and the central bank-backed Baihang Credit, the country’s first licensed personal credit agency, will share the data more widely with banks and other lenders to adequately evaluate risks and prevent over-borrowing. Which is ironic for a country whose debt levels have absolutely exploded in the past year to keep the economy humming amid the covid lockdowns.
“China seems to be making the unpopular, albeit right choice to sacrifice the current closed loop mentality financial paradigm in favour of a broader digital identity framework with potentially better access and greater efficiency in the long run,” said Alex Sirakov, founder of AquariusX, a Shanghai-based consultancy. Translation: even more central planning is just swell.
The plan adds to recent proposals to sharpen scrutiny of the technology champions and rein in empire building, mainly in the financial sector, according to Reuters. The shift was also behind the dramatic collapse of fintech giant Ant’s $37 billion IPO in November, a collapse which is now also being leveraged to expose even more information from the sector. Since then, the regulators have launched an antitrust probe into Ant’s former parent Alibaba and ordered the fintech company to shake up its lending and other consumer finance businesses.
The latest regulatory proposal for internet companies also comes as Beijing grows wary of loose risk controls at banks, mainly smaller ones, in terms of consumer loans and their excessive reliance on platforms such as Ant to find customers.
“Smaller banks are generally in a weaker position when they partner with fintech giants like Ant. They have heavily relied on Ant’s data to underwrite loans and manage risks,” said one senior regulator.
“When defaults happen, they have to shoulder most of the losses,” said the regulator, who declined to be named because of the sensitivity of the matter. “It’s crucial for lenders to have better access to more comprehensive and detailed credit data on borrowers.”
And there it is: with SOE banks having lost control over a substantial portion of the loan-creation machinery, Beijing is now desperate to regain said control. And it is starting by forcing the “sharing” of all loan data.
Naturally, the latest regulatory attempt would likely dampen the scale and profitability of the tech giants’ credit businesses which are among the biggest drivers of growth and revenue. That area is a cash cow, as the companies levy high service fees on banks in exchange for access to millions of customers using propriety data.
Take Jack Ma’s Ant Financial: via its super-app Alipay, Ant collects the data of more than 1 billion people, many of whom are young and internet-savvy users without credit cards or sufficient credit records with banks, as well as 80 million merchants, according to the company’s prospectus and analysts. Ant also runs Zhima Credit which means “Sesame Credit” in English, one of China’s biggest private credit-rating platforms, with proprietary algorithms and methodology that score people and small businesses based on their use of Ant-linked services.
The firm offers limited borrower information to about 100 banks, and takes the so-called “technology service fees” – a 30%-40% cut, on average, of the interest on loans it facilitates, analysts have estimated.
Ant’s consumer lending balance stood at 1.7 trillion yuan ($263 billion) as of the end of June, accounting for 21% of all short-term consumer loans issued by Chinese deposit-taking financial institutions. Compared with Ant, rivals Tencent and JD.com run relatively smaller consumer-credit business.
Tencent’s private lender WeBank has operated consumer-loans unit Weilidai since 2015, which made over 460 million loan drawdowns worth a total of more than 3.7 trillion yuan as of the end of 2019, according to WeBank’s 2019 annual report.
JD.com’s fintech arm, JD Digits, operates two platforms – Baitiao and Jintiao – which had a combined 70 million annual active users and took in a total of 4.4 billion yuan in technology service fees during the first half of 2020. Jintiao facilitated consumer loans worth only 261 billion yuan in the same period of last year, as per JD Digits’ prospectus.