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China's digital yuan threatens sprawling Alibaba empire

Official currency could hobble growth by crippling payments operation

Ant Group, the Hangzhou, Zhejiang Province-based financial company under the umbrella of Chinese e-commerce giant Alibaba Group, was forced to postpone its stock market listing in Shanghai and Hong Kong.   © AP

TOKYO -- The Chinese government has begun to move to prevent the business expansion of Alibaba Group and Tencent despite having once protected the country's two leading information technology companies.

The move comes as the two IT giants have spread their wings to the financial sector and started threatening the country's existing financial system. But the Chinese government cannot impose blanket regulations on them because of their strong influence.

Under such circumstances, the view has emerged that China's digital yuan will put the brakes on IT companies' expansion by depriving them of their payment operations. Alibaba has expanded its "territory" from IT to distribution and finance, but is the twilight of the Alibaba empire in sight?

China's regulatory authorities announced on Dec. 24 that Alibaba is under investigation on suspicion of violating the anti-monopoly law. Ant Group, the financial company under the umbrella of Alibaba, also faced questioning and guidance from financial authorities.

Ant operates Alipay, Alibaba's cashless electronic payment service. In November, Ant was forced by authorities to postpone its stock market listing. Ant had planned to raise $34.5 billion by listing its shares in Shanghai and Hong Kong.

The announcement of the anti-monopoly probe into Alibaba came less than a week after the Chinese Communist Party and the Chinese government wrapped up a key annual economic meeting.

The Central Economic Work Conference, which ended on Dec. 18 after discussing China's economic management policy in 2021, decided to strengthen anti-monopoly efforts and prevent "disorderly expansion of capital."

In a speech at a financial conference in Shanghai on Oct. 24, billionaire Alibaba founder Jack Ma made remarks critical of the Chinese authorities' move to tighten regulations. "We can't use yesterday's methods to regulate the future," he said at the time.

Alibaba has embarked on the consumer loan business using Alipay, as well as undertaking credit examination through artificial intelligence. If it procures a huge amount of funds through Ant's listing, it could become an entity more powerful than the banks.

While issuing a warning to Alibaba by forcing Ant to postpone its listing, the Chinese government is believed to be aiming to introduce measures to rein in the expansion of Alibaba and other IT companies.

The Chinese government initially protected Alibaba's cashless payment service as technology that revolutionizes distribution and finance. As a result, the service proliferated, especially in urban areas, where cash is now rarely used.

Alibaba Group’s billionaire founder Jack Ma, shown here in a November 2018 file photo, has long shown confidence in the IT company’s financial operations.   © Reuters

But as a result of government protection, the electronic payment market is now dominated by Alibaba's Alipay and Tencent's WeChat Pay, which have market shares of 55% and 39%, respectively.

The use of UnionPay debit cards issued by banks and credit cards has not increased significantly. Startups and consumers have also come to rely on the financial arms of IT companies, instead of on banks, for borrowing.

What has emerged as a particularly serious threat to banks is Alibaba's investment fund.

In electronic payments using Alipay, money is used after being transferred to Alipay from bank accounts and elsewhere.

Alibaba set up Yu'ebao, a money market fund, to allow users to invest money remaining in their Alipay accounts, instead of returning the money to their bank accounts, through Alipay.

Users can use their smartphones to cancel their investments easily. The returned money can then be used for payments again. Lured by higher yields than deposit rates offered by banks, Alipay users have shifted money from their bank accounts to Yu'ebao.

In June 2018, the overall size of Yu'ebao-linked funds reached 1.86 trillion yuan ($285 billion), exceeding the amount of ordinary deposits held at the Bank of China, one of the country's four biggest state-owned banks.

Such personal deposits at Bank of China totaled 1.79 trillion yuan at the end of 2017.

As IT companies began to threaten the existing realm dominated by state-owned banks and others, the Chinese government gradually tightened regulations on IT companies' financial operations, spreading a net over rapidly growing small-lot loans extended through the internet.

Furthermore, the Chinese government also began to require Alipay and WeChat Pay to deposit reserves at the country's central bank, the People's Bank of China, as it does with banks.

But the overall size of Yu'ebao-linked funds swelled to about 2.54 trillion yuan in June 2020.

If IT companies' financial operations expand in areas outside financial authorities' control, China's financial policy will lose its effectiveness and existing banking and securities operations will also be put in danger.

There are also growing calls within the Chinese government for a harder line on the expansion of IT companies.

Yao Qian, chief of the science and technology supervision bureau at the China Securities Regulatory Commission, said in December that the country should consider imposing a digital services tax on large IT companies.

But weakening IT companies' power quickly carries a high risk. Smartphone payments have now become a key part of life infrastructure for ordinary people. If they are regulated excessively, the real economy, such as the retail sector and online shopping, will slump.

As a game changer to alter this situation, the Chinese government now pins its hopes on the digital yuan.

When he was serving as head of the People's Bank of China's digital currency research institute, Yao argued that "digital currency payments will not need to rely on any intermediary function."

Under the current plan, users of the digital yuan are supposed to set up digital yuan accounts, or digital wallets, at banks where they have their deposit accounts and then convert necessary amounts of cash into digital yuan.

Users can pay digital yuan directly to others from their digital wallets installed on their smartphones. It is also possible for a user to make payments by putting their smartphone close to another person's smartphone without using the internet.

Users do not need to transfer money to third-party settlement institutions acting as intermediaries like Alipay. This means their deposits remain at banks.

India got a head start over China in terms of smartphone payments that do not use third-party settlement institutions, although its system is different from the digital currency-based one.

India introduced a payment system called Unified Payments Interface in 2016, linking bank accounts and smartphone payments.

If UPI users scan shops' QR codes on their smartphones and take necessary payment procedures, money is transferred from their bank accounts to the bank accounts of payees. The money transfer can be confirmed on the apps of both buyers and sellers.

It can also be said to be a debit card-like system using smartphones.

The Paytm app, a payment app that transfers money from bank accounts in advance like Alipay, initially saw its market share grow in India. Paytm is an Indian IT company in which Ant and Japan's SoftBank invested.

But with the proliferation of UPI, the Paytm app lost its momentum.

In India, payment apps that direct money transfers from banks using UPI, such as PhonePe under the umbrella of U.S.-based retail giant Walmart and Google Pay of U.S.-based search giant Google, have become mainstream.

If China introduces the digital yuan, new apps that assist payments will also appear. Even if it does not immediately lead to the strongholds of Alipay and WeChat Pay crumbling, the two companies' oligopoly might collapse.

In India, although Paytm's monopoly has been prevented, the trend of the two U.S. companies' apps supporting UPI oligopolizing the market is strengthening. The Indian government plans to cap the number of a single app's transactions at 30% of total transactions.

The tug-of-war between governments and companies over currencies is intensifying around the world. Headwinds are now beginning to blow for the sprawling Alibaba empire as well.

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