Since its IPO was temporarily halted at the end of last year, Ant Group has repeatedly faced corrections and crackdowns from China’s financial regulators. However, according to recent reports, Ant, China’s largest electronic 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 the Voice of America that Chinese 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 Chinese officials to gradually “nationalize” the consumer data and payments businesses 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 banknote yuan.
In an interview with the Voice of America, Lin Shih-Chieh, director of the Institute of Financial Research at Taiwan’s Financial Research and Training Institute, said that while the Bank of China is leading the world in the implementation of 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 launched smoothly. 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 percent and 40 percent of China’s e-payment market respectively, and such a high monopoly rate has already committed an official taboo in China. 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 Bank’s perception, 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 come to 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 the scale of three parts of the world.”
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 enterprises 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 cracking down on monopolies, Lin Shijie said that Chinese private companies have to cooperate with officials for the sake of overall survival, on the balance of two pairs. In Ant’s case, although the payments business accounts for 36% of its revenue, the largest revenue comes from micro-loans, accounting for about 40%. Moreover, the profits of micro-loans, wealth management (Balance) and insurance are all higher than the payment 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 believes that Chinese officials will continue to target private companies’ data, credit, credit and credit rating businesses, possibly by setting up state-owned enterprises or taking a direct stake in them 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.”
According to the report, Ant has been asked to transfer the consumer credit data of hundreds of millions of users to a newly established state-owned credit information company managed by the former PBoC executive. 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 even argued that the company should be led by the Ant Group, but PABC held an opposing view, citing conflict of interest.
Nationalization
The chief executive of Hong Kong-based Wisdom East Securities Limited, Lin Changnian, argued that although PABC wants to rely on Ant’s technology to develop the digital yuan, Ant has no way to resist and is bound to cooperate and surrender the users’ big data to the official, because 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 the focus on the digital renminbi as a very different currency or exaggerating its competitiveness,” Yang told 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 this is because, at all, China does not 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 also said 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 major 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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