Chinese financial regulators have summoned all of China's leading tech names to rein in their distribution of consumer credit and to warn them to cut out their monopolistic behavior.
The Chinese authorities are mandating reform for 13 domestic Internet companies, a Who's Who of the Chinese tech world. The fintech businesses of WeChat superapp operator Tencent Holdings TCEHY, the "Chinese Google" Baidu (BIDU) , consumer goods giants JD.com (JD) and Meituan MPNGF, ride-hailing company Didi and TikTok operator ByteDance have all been called in for those talks.
State media announced the regulatory pressure late Thursday night, Asian time. The Hong Kong shares of the companies involved have all fallen on Friday. The pressure should concern investors in Chinese tech names, with Beijing clearly desperate to assert control over companies that had been revered as unicorns of tech success.
Meituan dropped 3.6% on Friday, JD.com lost 2.7%, Baidu fell 2.4% and Tencent drifted 1.4%, Didi and ByteDance are private and thought to be preparing for initial public offerings.
The move comes after China earlier this month levied a record C¥18.2 billion (US$2.8 billion) fine against Alibaba Group Holding (BABA) -- an amount equal to 4% of its total revenue in China -- for engaging in anticompetitive behavior, particularly its past practice of "Picking One From Two" that forced big-name brands to sign exclusive deals to sell online only through its Taobao and Tmall sites.
Two days later, Alibaba's Ant Group fintech spinoff agreed to restructure and be licensed as a financial holding company, like a bank. Ant, which grew out of the Alipay electronics payment app, had been preparing for the largest initial public offering in history last November until Chinese President Xi Jinping stepped in and stopped the offering two days before it was due to happen.
Alibaba shares actually rose after its fine and the restructuring of Ant because the sanctions weren't quite as bad as they could have been. But Alibaba sold off in sympathy on Friday, its Hong Kong shares down 2.8% even though Alibaba is not part of the group of 13, having already settled its regulatory score.
New regulation requires Chinese fintech platforms to hold 30% of all the loans that they co-lend with banks. That will drastically reduce the ability of the tech companies to lend. The fintechs had been trying to have it both ways, casting themselves as financial companies while insisting that they only acted as a third party linking consumers with lenders.
The other companies called in for the talks are the finance arms of mobile phone maker Xiaomi XIACY, the "Chinese Twitter" Sina (SINA) , the electronics and appliance retailers Suning SZ:002024 and Gome GMELY, the online travel agency Ctrip (TCOM) and browser and antivirus software maker 360 DigiTech (QFIN) .
All of China's top financial regulators are involved. The central People's Bank of China is conducting the review with the China Banking and Insurance Regulatory Commission, the China Securities Commission and the State Administration of Foreign Exchange (SAFE).
Reuters has reported that Tencent faces a fine of at least C¥10 billion (US$1.6 billion) over its anticompetitive practices, although that investigation centers on its use of exclusive artist rights to dominate music streaming in China.
Meituan, which originally specialized in delivering groceries, is also under investigation for Picking One From Two behavior, SAFE said earlier this week. This is sure to end in a fine as well. If priced at 4% of revenue, like Alibaba, that would amount to C¥4.6 billion (US$711 million).
Chinese state-owned banks run very traditional businesses that favor lending to state-owned enterprises. Consumers and small businesses complain that it is very hard to get loans. For the longest time, credit cards were unheard of in China.
Alipay and WeChat Pay were created as e-wallets to enable easy digital transactions on Web platforms. Given the lack of credit cards, they then branched into extending small amounts of credit for consumers making purchases. They gradually morphed into consumer credit companies with their fingers in almost every fintech pie.
Chinese regulators were slow to understand their scope and just how influential they had become in the Chinese financial system. Together with the introduction of an official e-yuan to rival bitcoin, these new measures seek to wrest control away from private businesses and restore it in the hands of the Chinese Communist Party.
Showing Big Tech who's boss
Xi is clearly worried about the huge influence wielded by companies such as Alibaba and the tech entrepreneurs who run them. Xi wants to make it clear that the Chinese Communist Party, with himself at the heart, is the ultimate authority. There's also a personal beef between Xi and leading financial regulators with Alibaba figurehead Jack Ma, who has led a flashy lifestyle in which he met monarchs and heads of state. That irked Communist officials, who were forced to meet and debrief Ma after his rock star excursions.
Last October, Ma criticized, correctly, the Chinese banking system for having a "pawnshop mentality" that insists on borrowers putting up collateral every time. Furious finance regulators in attendance at the conference in Shanghai decided they had had enough. Ma's very public criticism came as the regulators were preparing new rules to govern fintechs and were likely an attempt to shape public opinion that backfired.
Ant is now reportedly in talks with Ma and regulators to negotiate Ma's exit from control over Ant. Although he does not have an executive role, he is central to the four-person group that exerts voting control over Ant. Ma has essentially disappeared from view, either under actual or self-imposed house arrest.
The heads of the other Big Tech companies in China are also now keeping their heads down and maintaining a low profile. Their fintech businesses will now have to get financial licenses and the amount of credit they extend will be scrutinized.
Chinese regulators are also examining how Internet companies handle consumer data. Communist officials have long wanted to get their hands on the reams of consumer information that those companies can gather. Wisely, those tech companies have resisted handing it over to government officials, but may now have no choice.
"Internet platforms have played a vital role in improving efficiency and reducing transaction costs, but they also have persisting issues, such as operating financial business without a license or beyond the boundaries they're permitted, incomplete governing mechanism, regulatory arbitrage, unfair competition, and hurting consumers' legal interests," the official news agency Xinhua reported, citing Chinese financial regulators.
Sending a message
Taking on these 13 famous tech names is intended as a message to smaller e-commerce companies. Other fintech platforms should act now by "looking in the mirror, looking for deficiencies, doing self-examinations and rectification," Xinhua states, rather than "taking advantage of the fire" to grab market share.
The pressure risks hampering China's freewheeling Internet commerce. Xinhua says the restructuring of Ant and the regulatory action against the 13 companies are "the first step of a Long March," echoing Communist propaganda.
The moves likely end the period of Internet development in China where the country blocked international competition behind the "Great Firewall of China" and was content to let tech companies build market dominance. That helped them expand into an extremely wide range of industries. With speech on the Internet heavily censored, the Communist Party clearly wants to establish dominance over Internet commerce as well.