Since its IPO was temporarily halted at the end of last year, Ant Group has been facing repeated reforms and crackdowns from China’s (Communist Party of China) financial regulators. However, according to recent reports, Ant, China’s largest e-payment leader, has leapt to become a strategic partner of the People’s Bank of China (PBOC) in developing a digital yuan (e-CNY) technology platform.
Two analysts told VOA that Chinese Communist Party officials have taken the first step to have private fintech companies such as Ant assist in the technology to successfully launch the digital yuan. While analysts have mixed views on the future of the digital yuan, they say it represents an attempt by the Communist Party to gradually “nationalize” consumer data and payments held by tech giants. However, some believe that the market has exaggerated the impact of the digital yuan, as it is no different from the effectiveness of the paper yuan.
In an interview with the Voice of America, Lin Shih-Chieh, director of the Institute of Financial Studies at Taiwan’s Financial Research and Training Institute, said that while the Bank of China is leading the world in implementing digital currency, the digital yuan faces many pressures and challenges.
Retail business is the key to success or failure
In addition to establishing the technical architecture first, he said, the PBoC will then have to expand its commercial pilot on the retail side, in order to build its ecosystem and expand private usage. He believes that by working with large retailers on the pilot projects, the Bank will be able to further identify issues such as system security or business procedures faced in the actual operation of the digital renminbi, and to strengthen the regulatory and supervisory measures accordingly. Therefore, he said, the next phase of retail business will be the key to the success or failure of the digital RMB.
If the retail business doesn’t get it right, the fact is that the digital (word) yuan can’t be pushed,” Lin said. I think the official’s biggest concern now is that after this digital (word) yuan is launched, there is no way to get the recognition and use of the private sector, then its effectiveness will be greatly reduced.”
In other words, the PBOC has to rely on private enterprises (including ant and large retail) to help in both the technical and market side for its digital yuan to be successfully launched. But if the digital yuan sits large in the future, the first to grab the market share held by Ant’s Alipay or Tencent’s WeChat Pay, which is not being sold to help count the money for tech giants like Ant?
China’s second central bank?
Lin Shijie said Alipay and WeChat Pay have a market share of about 54% and 40% of China’s e-payment market respectively, and such a high monopoly rate has already violated the official taboo of the Chinese Communist Party. And the two companies have accumulated such a high pool of money from the private sector that if they join forces, officials are worried that they could “become China’s second central bank. Therefore, he said, in the perception of the PBOC, its launch of the official version of the digital yuan is a win-win situation for the two major enterprises.
Through my (PBoC) business cooperation with you (private enterprises), you help me promote the digital (word) yuan, then I will help you solve the market monopoly situation,” said Lin Shijie. Because, I think, now these large enterprises have now formed a natural monopoly scale, it unless the business directly shut down, it this market share is simply impossible to come down. So, now, the best way is to appear a strong and powerful competitors, to divide his (their) now two parts of the market, at least to reach three parts of the world this kind of scale.”
Lin believes that in the short and medium term, it will be difficult for the official version of digital RMB to carve up the Chinese payment market because of the importance that some consumers and businesses attach to the privacy of the gold stream. And the digital yuan has yet to establish a business ecosystem. As a result, he said, there is still a long way to go in the three-way split, and the two major payment groups, Ant and WeChat, should not be too worried at the moment that their market shares will be easily divided.
Profitable for Ant?
In the atmosphere of tightening technology regulation and strict monopoly, Lin Shijie said that Chinese private companies have to cooperate with the official for the overall survival of the two pairs of trade-offs. In Ant’s case, although its payments business accounts for 36 percent of its revenue, the largest bulk of revenue comes from microloans, which account for about 40 percent. Moreover, microloans, wealth management (balance of payments) and insurance are all more profitable than the payments business. Therefore, he said, if Ant gives up a little market share of its payments business to the official in exchange for its operating space in microloans, wealth management and insurance, it may still be profitable for Ant.
However, in addition to payments, Lin Shijie believes that CCP officials should continue to target private companies’ data, credit, credit and credit rating businesses next, possibly by setting up state-owned enterprises or taking direct stakes to increase the tech giant’s nationalization, or even nationalize it.
According to sources quoted by the Financial Times on April 23, “The People’s Bank intends to take over Ant’s credit data and share it with all state-owned banks.”
Officials have asked Ant to transfer the consumer credit data of hundreds of millions of users to a newly established, state-owned credit information company run by a former PABC executive, the report said. The company will simultaneously provide services to other financial institutions, including state-owned banks with which Ant has lending business competition. Ant, however, is said to be resistant, as the data is the group’s most valuable asset and could affect its valuation for a future IPO. Ant has even argued that the company should be led by Ant Group, but PABC is opposed, citing conflicts of interest.
Nationalization
Lin Changnian, chief executive officer of Hong Kong-based Wisdom East Securities Ltd, argued that while PABC wants to rely on Ant’s technology to develop the digital yuan, Ant has no way to resist and will inevitably have to cooperate and surrender its users’ big data to the official, as the Communist Party will not allow the company to get too big to manage.
The regulatory authorities have told Ant that you have to give the big data to the central bank, and you can’t enjoy it for yourself,” Lin Changnian told Voice of America. That is, the sky is bigger than the Communist Party.”
Lin Changnian said that with the digital yuan, China’s “big brother” can always keep track of the financial flows of individuals and enterprises, and it will be easier to catch financial criminals and even dissidents.
He believes that since commercial banks will cooperate with the PBOC, it is likely that all future transactions in China will be conducted through the PBOC’s digital renminbi, and its application and market share should be expected. For example, China’s future transactions with Iran and Russia can use the digital yuan, no longer using the U.S. dollar, and can also bypass the international clearing mechanism dominated by the U.S. dollar.
However, Anne Stevenson-Yang, co-founder and head of research at J Capital Research, believes that the market has overstated the impact of the digital yuan.
Digital yuan has limited impact
I think too many people are misplacing their focus and thinking that the digital yuan is a very different currency or exaggerating its competitiveness,” said Sian Yang to Voice of America. I don’t think the digital yuan is different from the (physical) yuan. Although China has repeatedly declared its intention to open up its capital account, the current international circulation of the yuan is too low, accounting for only 2 percent of the value of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payments, and that’s because, at all, China doesn’t want (the yuan) to circulate internationally.”
Yang Si’an said digital currency is already a global trend, as countries are already using less and less paper money. She argued that the purpose of the PBOC’s digital yuan launch focuses on financial regulation, rather than competing with private companies or other currencies such as the U.S. dollar. She added that in the future, the digital yuan will only play the role of engine and back office, so most consumers will not feel much change because they will still use platforms such as Alipay or WeChat Pay in the foreground, although the PBOC will require the two platforms to settle through their digital yuan. For e-commerce, one more payment system is not a bad thing, she said.
Yang also said that Ant has state-owned shareholders, nationalization is not the point, and Ant and Tencent two companies have invested considerable resources and money in the payment platform, but the payment business is not very profitable, and the two companies have not yet developed the data they have, or profit from it.
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