Last Friday, Jack Ma’s Alibaba was slapped with a $2.8 billion fine and ordered rectification for monopoly, which was analyzed in detail in the last newsletter.
After the market is closed in this time zone (GMT+8) on Monday, the People’s Bank of China met with Alibaba’s financial affiliate Ant Group and published a readout. Ant Group also posted its own statement.
On Tuesday, the State Administration for Market Regulation, the Cyberspace Administration of China, and the State Tax Administration held a meeting with 34 Chinese tech companies and published a readout on their meeting.
There are numerous good news reports and analyses out there. As a complementary reading, this newsletter takes you through a sentence-by-sentence breakdown of the original text and puts them in context. Usual disclaimers apply.
One way to get the background or jog your memory is to read the Pekingnology newsletter on Dec. 29, 2020, Detailed breakdown of PBoC deputy governor's Q&A on Jack Ma’s Ant Group, and the last newsletter Beijing's anti-monopoly findings on Alibaba: a deep dive.
Let’s start with the meeting readout between financial regulators with Ang Group.
On April 12, 2021, four financial regulators - People's Bank of China, China Banking and Insurance Regulatory Commission, China Securities Regulatory Commission, and the State Administration of Foreign Exchange - jointly interviewed Ant Group again. Pan Gongsheng, deputy governor of the People's Bank of China, answered questions from reporters on behalf of the four departments.
Note: It’s the same financial regulators and lead official as of December 26, 2020 (CHN, PBoC) - they only deal with the financial part of Jack Ma’s tech empire, not the market monopoly of e-commerce behemoth Alibaba.
Q: What are the considerations for the financial regulators to talk about Ant Group again?
A: The Fifth Plenary Session of the 19th CPC Central Committee, the Central Economic Work Conference and the Ninth Meeting of the Central Financial and Economic Committee clearly stated that it is necessary to strengthen anti-monopoly and prevent disorderly expansion of capital, so as to effectively guard against risks.
It is necessary to set out from the strategic height of building a new competitive advantage of the country, establish and improve the governance system of the platform economy, and promote the regulated, healthy, and sustainable development of the platform economy.
Since the joint supervision interview of the four regulators in December last year, Ant Group has set up a special team to work out the rectification plan under the guidance of the financial regulators and actively carry out the rectification work. The financial regulators once again jointly interviewed the relevant personnel of Ant Group, mainly requiring Ant Group to face up to the serious problems existing in financial business activities and the seriousness of rectification work, and to conduct in-depth and effective rectification against the supervision requirements and the drawn rectification plan to ensure operation compliant with laws, make innovation while keeping to the right path, and develop in a healthy manner. Ant Group must adhere to the origin of serving the real economy and the people, actively respond to the national development strategy; on the premise of meeting the requirements of prudential supervision, increase innovation in financial technology, enhance international competitiveness in the field of financial technology, and play a greater role in building a new development paradigm of "dual circulation."
Note: This part explains why the regulators do it.
1) It’s about the implementation of the relevant decisions of the Fifth Plenary Session of the 19th CPC Central Committee, the Central Economic Work Conference, and the Ninth Meeting of the Central Financial and Economic Committee.
Pekingnology has one newsletter on each of the three meetings:
For the Central Economic Work Conference Comprehensive review of the Central Economic Work Conference readout (Dec. 19)
For the Fifth Plenary Session of the 19th CPC Central Committee: The "Spirit" of the 5th Plenum 五中全会精神 (Feb. 25)
For the Ninth Meeting of the Central Financial and Economic Committee: Meeting on "Platform Economy" and new SAMR rule on e-commerce (March 17)
2) If you are unfamiliar with the concept of “platform economy,” check this out from Deloitte in 2018, which this newsletter has quoted before:
The rapid development of digital technology has revolutionized the way business is done today. At the heart of this change is the new platform economy. In the Internet platform economy, platform, consumers and service providers form a collaborative network. Platform is the foundation of the entire ecosystem, providing a space for the exchange of information, trading, logistics and other facilities to consumers and service providers. A large number of consumers and service providers constitute the major players of the platform economy. They perform various economic activities on the platform including information exchange, demand matching, payment and receipt and delivery of goods. The participants of the platform economy interact and cooperate with each other, which enables to create greater value.
3) Despite highlighting the necessity “to strengthen anti-monopoly and prevent disorderly expansion of capital, so as to effectively guard against risks,” the text says “it is necessary to set out from the strategic height of building a new competitive advantage of the country.” In other words, if the “platform economy” grows well and in a regulated fashion, it is believed to be a new competitive advantage of China in the world.
The “platform economy” is believed by some as doomed for a comprehensive crackdown, particularly given that almost all significant players in the sector are all private companies instead of state-owned enterprises.
This belief, in the opinion of your Pekingnologist, needs to balanced by the message that officially Beijing believes, all things considered, the whole “platform economy” is good for the country.
4) This part gives due recognition of Ant Group’s cooperation with the financial regulators
Since the joint supervision interview of the four regulators in December last year, Ant Group has set up a special team to work out the rectification plan under the guidance of the financial regulators and actively carry out the rectification work.
5) But the work is far from done and Beijing has expectations
requiring Ant Group to face up to the serious problems existing in financial business activities and the seriousness of rectification work, and to conduct in-depth and effective rectification against the supervision requirements and the drawn rectification plan to ensure operation compliant with laws, innovation while keeping to the right path, and healthy development. Ant Group must adhere to the origin of serving the real economy and the people, actively respond to the national development strategy, increase innovation in financial science and technology, enhance international competitiveness in the field of financial technology, and play a greater role in building a new development paradigm of "dual circulation".
On Ant Group must serve the “real economy”, here is Prof. Yang Jian, director of the J.P. Morgan Center for Commodities, University of Colorado Denver, on Beijing Review, summing up what your Pekingnologist believes is Beijing’s general thinking:
As China's financial system develops, more extensive use of financial innovations, from derivatives to financial technology, is unavoidable. However, the unpleasant U.S. experience of using innovative derivative products and their role in the 2007-08 global financial crisis shows that financial derivatives are a double-edged sword. Too much complexity makes them unsuitable for supporting the real economy and intractable for financial regulation.
But Beijing still encourages “increase innovation in financial technology,” as long as it is “on the premise of meeting the requirements of prudential supervision,” i.e. not threatening financial stability.
Q: What are the main contents of Ant Group's rectification plan?
A: Since the start of Ant Group's rectification work, the financial regulators have conducted in-depth communication with Ant Group on rectification measures, and urged Ant Group to (have) form(ed) a comprehensive and feasible rectification plan.
The rectification mainly includes five aspects:
First, correct the unfair competition behavior of payment business, give consumers more choices in payment methods, remove the improper link between Alipay and financial products such as Huabei and Jiebei, and correct the rule-breaking behaviors such as nesting credit lending business in the payment link.
Second, break the information monopoly, strictly implement the requirements of the Regulation on the Administration of Credit Investigation Industry (ENG), operate personal credit reporting business with a license according to law, and collect and use personal information according to the principle of "legality, minimum and necessity,"ensure the information security of individuals and the country.
Third, Ant Group is to apply as a financial holding company as a whole, and all its institutions engaged in financial activities are to be brought into the financial holding company to accept supervision, improve risk isolation measures and regulate related party transactions.
Fourth, strictly implement prudential supervision requirements, improve corporate governance, seriously rectify rule-breaking financial activities such as credit reporting, insurance, and wealth management, and control high leverage and risk contagion.
Fifth, control the liquidity risk of important fund products, and actively reduce the balance of Yu'ebao.
1）Ant Group also issued a statement in both Chinese and English and comparing that statement to the part above helps. Below is the part in its statement that corresponds well with the above:
Ant Group, in its entirety, will apply to set up a financial holding company to ensure our financial-related businesses are fully regulated.
Returning to its origin, our payment business will serve consumers and SMEs (small-and-medium enterprises) by focusing on micro-payments and bringing them convenience.
Ant Group will set up a personal credit reporting company and apply for a personal credit reporting license. We will conduct the personal credit reporting business in compliance with relevant laws and regulations, strengthen the protection of personal information, and effectively prevent the abuse of data.
“Jiebei” and “Huabei” will be operated by our consumer finance company which will be operated in compliance with relevant laws and regulations.
We will strengthen consumer rights protection as well as suitability management of financial consumers.
We will also further enhance our corporate governance, adhere to fair competition rules, bring related-party transactions into line, strengthen risk prevention and control, create a fair market environment, and further strengthen our corporate social responsibility commitments.
Those actions mentioned above will be carried out after completing the relevant procedures provided in the regulatory requirements and Ant Group’s corporate bylaws.
2) Some explanations, but you are recommended to read the Pekingnology newsletter on Dec. 29, 2020, Detailed breakdown of PBoC deputy governor's Q&A on Jack Ma’s Ant Group, where nearly every one of Ant Group’s perceived violations is identified.
Ant Group’s statement says it will strengthen the suitability management of financial consumers. This is likely a rectification against the accusations it lends too recklessly to consumers - they borrow more than they can afford.
The statement says “Ant Group will set up a personal credit reporting company and apply for a personal credit reporting license” is a recognition that Zhima/Sesame Credit, its flagship credit reporting business, does NOT have a personal credit reporting license, but only a license for corporate credit rating.
The readout says the financial regulators asked Ant Group to
give consumers more choices in payment methods, remove the improper link between Alipay and other financial products such as Huabei and Jiebei, and correct the rule-breaking behaviors such as nesting credit lending business in the payment link.
For those of you who haven’t used the Alipay app, it might be difficult to understand. For example, when you pay for something via Alipay, you can pay via the app from your linked (to your Alipay account) debit and credit cards, but you can also pay via Huabei, a virtual credit card; you can still pay directly out of your Alipay account, which is several clicks away from drawing money from Jiebei, a micro-lending business. How the dynamics within the Alipay will change, pursuant to those changes, will be interesting to watch.
3) For more details governing financial holding companies in China, which Ant Group will become, here is a non-rating commentary from Fitch Ratings.
4) For Ant Group’s massive, exclusive treasure of billions of customers’ credit information, your Pekingnologist recalls this story from the Financial Times on March 1, which quoted anonymous sources as saying Ant Group defies pressure from Beijing to share more customer data
5) Yu’e bao, asked to be reduced in size per point No.5 in the readout, is a money-market fund that grew so large that at one point it was the Earth’s Largest Money-Market Fund (WSJ). The financial regulators apparently don’t want too many eggs in one basket.
The financial regulators will urge Ant Group to effectively implement the rectification plan, work in due course, maintain business continuity and normal operation of the company, ensure that the people's experience of financial services does not decline, and continuously improve the service level of inclusive financing.
Note: This basically says “we won’t rush it” to imperil continuity or user experience - lots of Chinese individuals’ lots of money and assets are managed via Ant Group, so “we will be careful.”
Q: How can the financial regulators strengthen the financial supervision of platform companies in the next step?
A: The financial regulators will adhere to the principles of fair supervision and strict supervision, focus on the long-term and take into account the current situation, fill shortcomings, strengthen weaknesses, promote fair competition, oppose monopoly and prevent the disorderly expansion of capital.
First, adhere to the principle of "finance as roots, tech as empowerments". Platform companies enaged in financial businesses should focus on serving the real economy and preventing financial risks, and should not make tech the "protective coloration" for illegal and rule-breaking activities. Rule-breaking business activities shall be severely punished according to law.
Second, insist that all financial activities should be included in financial supervision. Financial business must be licensed. (We will) improve the ability and level of supervision, optimize the regulatory framework, and prevent regulatory arbitrage.
Third, pay equal attention to development and regulation. Strengthen supervision according to law, maintain market order, prevent market monopoly, and protect data property rights and personal privacy; At the same time, learn the law of the development of the platform economy, improve the experience of financial services, and consolidate and enhance the international competitiveness of platform companies.
The financial regulators will, as always, adhere to the "two unwaverings," create a fair competitive market environment, continue to support private capital to carry out financial technology activities according to law, protect property rights according to law, promote entrepreneurship, and stimulate the market vitality and technological innovation ability of private capital.
1) This part doesn’t mention Ant Group by name but addresses platform companies generally. So, presumably, all those platform companies with financial businesses should be listening carefully.
Who counts as platform companies? This newsletter will get to them later.
The financial regulators will adhere to the principles of fair supervision and strict supervision
公平监管 fair supervision suggests that everyone will be equal under supervision - Ant Group is just the most high-profile one, but others shouldn’t assume the supervision only targets Ant.
从严监管 strict supervision should be understood that the more strict options WITHIN the discretionary penalties. An obviously oversimplistic example is if it’s 从严 and the law permits a fine between $1 and $10, then the actual fine would go above $5. The term however also sends a clear warning to other platform companies.
3) “金融为本、科技赋能”, which is translated as "finance as roots, tech as empowerments" here, suggests “tech” works for/enables/empowers “finance.” However a prospectus dresses a fintech up, at the end of the day, and in the eyes of Chinese financial regulators, tech is just the means to do finance.
4) The following sentences in this part all convey the same message, like “all financial activities should be included in financial supervision. Financial business must be licensed; Improve the ability and level of supervision, optimize the regulatory framework, and prevent regulatory arbitrage.”
If a tech company or fintech company wants to argue to the financial regulators they are“tech in nature,” that won’t fly. They are “finance” in nature and will be regulated as such.
pay equal attention to development and regulation
in essence, translates to that tech companies shall have no illusion that they can “develop” without compliance with regulations - any longer. To put it bluntly, the days are gone that they expanded into the financial sector without abiding by relevant financial regulations.
maintain market order, prevent market monopoly, and protect data property rights and personal privacy
Each appears to mean something:
“maintain market order” appears to mean the tech companies cannot engage in race-to-the-bottom competitions, for example burning through cash to squeeze out others in an unsustainable fashion and
“prevent market monopoly” is quite clear in itself. Regulators would want to see more than one competitor instead of overwhelming concentration in a given market.
“protect data property rights and personal privacy” points to the rampant and excessive collection of user data and private information from their apps or web browsers.
7) consolidate and enhance the international competitiveness of platform companies speaks for itself
8) Once again the “两个毫不动摇” "two unwaverings" is here. As explained in the Dec. 29, 2020 newsletter, the full version is
Unwaveringly consolidate and develop the public-sector economy, and unwaveringly encourage, support and guide the development of the non-public-sector economy
Chinese leader Xi Jinping highlighted the set phrase in a speech to private entrepreneurs (CHN) on November 1, 2018, where he said
The non-public sector's status and functions in the country's economic and social development have not changed. The principle and policies to unswervingly encourage, support, and guide the development of the non-public sector have not changed, and the principle and policies to provide a sound environment and more opportunities to the sector have not changed either.
Despite two unwaverings, for anyone immersed in Pekingology, the emphasis was squarely on boosting private enterprises’ confidence, as the title of Xinhua’s English-language report at the time shows: Xi stresses unswerving support for development of private enterprises.
Now, Pan, the central bank vice governor, again cited the "two unwaverings” - it was cited in the Dec. 26, 2020, joint interview readout (CHN, PBoC).
Again, the message here is along these lines: this is NOT a crackdown on private companies; there is NO official policy change on private companies; they are NOT “falling out of favor”; this is NOT ideologically driven (since the companies in question are private rather than state-owned).
The sentence below further enhances the message.
create a fair competitive market environment, continue to support private capital to carry out financial technology activities according to law, protect property rights according to law, promote entrepreneurship, and stimulate the market vitality and technological innovation ability of private capital.
Q: What are the considerations of China's financial regulators in strengthening international financial technology supervision cooperation?
A: In recent years, the rapid development of financial technology and platform economy has played an important role in improving the efficiency of financial services and the inclusiveness of the financial system and reducing transaction costs. At the same time, because of its characteristics of cross-sector, mixed operation, and cross-regional operation, the risk spreads faster and wider, and has stronger negative spillover effect, which poses new challenges to financial supervision and becomes a new problem faced by regulatory authorities all over the world.
The regulatory authorities of major economies in the world pay close attention to this and have taken practical actions to make regulatory adjustments and policy responses. In the concept of supervision, they follow the principle of "same business and same supervision" and strive to strike a balance between promoting the development of financial technology and preventing financial risks. In terms of supervision methods, they explore the use of scientific and technological achievements such as big data, cloud computing, and artificial intelligence, and enhance the risk monitoring perception ability and penetrating supervision ability. For what is regulated, they emphasize personal information protection and anti-monopoly. For example, the EU implemented the General Data Protection Regulations in 2018 and accelerated the Data Governance Act; In recent years, the United States has continuously launched anti-monopoly investigations on large technology companies; Germany passed the tenth amendment to the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen – "GWB")
China's financial regulators are willing to further strengthen cooperation with international financial organizations and regulatory authorities of various countries in anti-monopoly, data supervision, operation management, consumer protection, etc., promote the formulation of financial technology regulatory norms, strengthen regulatory coordination, jointly create an open, inclusive and safe financial technology ecological environment, enhance the innovation capability of the financial industry, and prevent cross-border regulatory arbitrage and cross-border financial risk contagion.
because of its characteristics of cross-sector, mixed operation, and cross-regional operation
This perhaps needs a bit of explanation.
“Cross-sector” refers to crossing traditional finance and tech sectors;
“mixed operation” refers to mixing deposit, lending, credit rating, insurance, and other businesses which require respective licenses;
“cross-regional” refers to the regional validity of a certain financial license. For example, a traditional Chinese bank could be licensed to do banking only within certain parts of China, but fintech could easily expand its business across the whole country.
2) The part also cites what it says are international practices from the U.S., EU, and German regulators. The "same business and same supervision" principle may refer to how the European Central Bank supervises banks that use fintech, where the exact wording is “same business, same risk, same supervision”（ECB).
3) It remains to be seen whether or how international financial organizations and regulatory authorities of various countries will respond to the call for cooperation.
4) There is a very recent example of Western fintech trying to tread the water in China, namely Revolut, as reported by The Telegraph.
Below is the official English statement in full from Ant Group, seen on its official WeChat account.
Using the rectification as an opportunity to reinforce our commitment to serve consumers and SMEs
On Dec. 26, 2020, financial regulators put forward five requirements to Ant Group for the rectification of its key businesses. Ant Group attaches great importance to the seriousness of the rectification. Under the regulators’ guidance, and in accordance with regulatory requirements, Ant Group has completed the formulation of our rectification plan.
Ant Group, in its entirety, will apply to set up a financial holding company to ensure our financial-related businesses are fully regulated. Returning to its origin, our payment business will serve consumers and SMEs by focusing on micro-payments and bringing them convenience. Ant Group will set up a personal credit reporting company and apply for a personal credit reporting license. We will conduct the personal credit reporting business in compliance with relevant laws and regulations, strengthen the protection of personal information, and effectively prevent the abuse of data. “Jiebei” and “Huabei” will be operated by our consumer finance company which will be operated in compliance with relevant laws and regulations. We will strengthen consumer rights protection as well as suitability management of financial consumers. We will also further enhance our corporate governance, adhere to fair competition rules, bring related-party transactions into line, strengthen risk prevention and control, create a fair market environment, and further strengthen our corporate social responsibility commitments. Those actions mentioned above will be carried out after completing the relevant procedures provided in the regulatory requirements and Ant Group’s corporate bylaws.
Ant Group fully recognizes that regulating the platform economy under relevant laws, and putting all financial-related activities under financial regulation, are important initiatives that consider the overall picture while balancing the industry’s growth and safety. By doing so, financial regulators are not only ensuring the healthy and orderly development of the industry, but are also safeguarding a fair market environment to promote higher quality growth in the future.
Under the guidance of financial regulators, Ant Group will spare no effort in implementing the rectification plan, ensuring that the operation and growth of our financial-related businesses are fully compliant. In the meantime, we will ensure business continuity and maintain service quality, and continue to enhance our capabilities to serve consumers, small businesses and the real economy.
Using the rectification as an opportunity, Ant Group will reinforce our commitment to serve consumers, small businesses and the real economy, and further focus on being a technology-driven company that innovates for good and creates open and win-win partnerships. We will put our growth proactively within the national strategic context, continue to invest in technological innovation, enhance our compliance capabilities, beef up our global competitiveness, strive to create societal value, and contribute to the new development paradigm of domestic and international circulations.
On Tuesday, the State Administration for Market Regulation (SAMR), the Cyberspace Administration of China, and the State Tax Administration gathered 34 Chinese tech companies to give administrative instructions (CHN).
1) Please note this is a meeting that doesn’t involve financial regulators and many of the 34 companies don’t have financial businesses - but they are by virtue of this meeting considered “platform companies.”
2) The full list can be seen as a who’s who in China’s tech world, so here are their names, in no particular order:
iQIYI, Baidu, Beike/Ke, Didi, Dangdang, Dmall, JD.com, Kuaishou, Meituan, MissFresh, Qihoo 360, Qunar, Sogou, Weidian, 58.com, Sina Weibo, Bytedance, Bytedance, Bilibili, Dingdong Fresh, Eleme, Gome, Hema Fresh, Pinduoduo, Ctrip, Xiaohongshu, Yuewen/China Literature, Suning, Alibaba, Beibei.com, Mogu, NetEase Yanxuan, Yunji, Vipshop, and Tencent.
In fact, the three regulators held a similar meeting in November 2020. Two companies which attended that meeting were not present in Tuesday’s meeting. They are travel management company 同程 LY.COM and grocery shopping company 兴盛优选 Xingsheng Youxuan.
3) As reported by Bloomberg and Reuters, this is a you-have-been-warned meeting and all of them are ordered to do a self-examination and self-rectification which will be followed up by inspection from the authorities. The three regulators also explicitly said they want to 充分发挥阿里案警示作用 “Give full play to the warning role of Alibaba’s case.”
4) The rule-breaking behaviors explicitly named include
a) “er xuan yi,” literally, “choose one out of two,” meaning punishing merchants from selling on rival platforms;
b) abuse dominant position in the market;
c) buying out leading but small entrants to a burgeoning market
d) burning through cash to grab market share in community group buying
e) discriminate against certain users based on big data
f) disregard counterfeiting on the platform
g) information leaks
h) tax-related violations
The most egregious act is “choose one out of two.” According to the meeting’s readout, “It is extremely harmful and must be corrected from the root.”
5) The readout also lays out five principles
Strictly prevent the disorderly expansion of capital and ensure economic and social security;
Strictly prevent monopoly to cause disorder and ensure fair competition in the market;
Strictly prevent strangulation (of rivals?) via tech and ensure the innovative development;
Strictly prevent the abuse of rules and algorithms to ensure the legitimate rights and interests of all parties;
Strictly guard against closed systems and ensure openness and sharing
The 34 companies are also asked to look into tax issues. (End)