China Puts The Kibosh On Both Bitcoin AND Big Tech
Ma may need to give up some of his bigger ambitions, but making Ant a financial holding company could bring absolution and profits. The Goldman Sach’s Solution Could Work Out Fine For Alibaba’s Jack Ma
Attempting to regain the good graces of Chinese authorities, Jack Ma’s Ant Group is considering becoming a financial holding company that would be regulated like a bank. The move would curb its ambitions to become a future-forward fintech company that’s more than a bank or mobile-payments provider.
But would that be bad? In 2008, after the collapse of Lehman Brothers, Goldman Sachs Group Inc. and other Wall Street heavyweights made a similar transition, from broker-dealers to bank holding companies. Goldman turned out just fine.
Ant is essentially planning to fold all units requiring a financial license into the structure, Bloomberg News reported, citing people familiar with the matter. That follows weeks of bad news for the ambitious firm that had become ubiquitous with the future of finance, innovation and digital payments in China, puncturing hopes for what was meant to be a blockbuster initial public offering valued at over $300 billion.
The potential transition follows an established formula. In September 2008, during the global financial crisis, Goldman announced it would become a bank holding company to navigate challenging financial markets.
Then-Chairman and Chief Executive Officer Lloyd Blankfein said the firm would be “regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources.”
Morgan Stanley made a similar announcement the same day. The Wall Street giants became subject to new rules for accounting, leverage tests and thicker capital buffers, growing stronger in the decade since.
The plan at least brings clarity for Ant and its deflated global investors. But what does being a financial holding company mean in China, especially at Ant’s scale? In September, the State Council issued new rules to regulate such entities. They took effect Nov. 1, so all this remains at fairly experimental stages.
The People’s Bank of China has said the measures were made necessary because “a small number of companies expanded blindly into the financial industry [in recent years] without adequate risk control mechanisms.”
If Ant is able to take a Goldman-style path, potentially having access to liquidity offered by the central bank isn’t such a bad thing. Nor would be the broader financial holding company definition of leverage. Ant’s prospects as a tech giant have grown more distant, but does it have a future as a market maker?
A more organized corporate structure that provides investors with transparency around costs and margins from each unit could bring a long-run boost to valuations. Sure, that would slow the tech-like, breakneck growth they’d counted on, but it would enforce good housekeeping. Ant could become one of the largest consumer lenders in China — and that’s not a bad business.
When regulators started mulling these rules in 2018, they were largely meant to clean up messy companies that had made their way into the financial sector, or just become far too unwieldy. HNA Group, Tomorrow Group and others had run amok, buying high-cash-flow businesses across all sectors, leveraging intergroup relationships and stretching their balance sheets.
A host of smaller companies that cropped up across China’s provinces became problematic because they “made blind expansions that fall into regulatory gaps and bring mounting risks,” state media said.
Let’s be clear: Ma and Ant don’t fall squarely into this category. Several subsidiaries are already licensed by various regulators. But the latest version of the rules are sweeping: In addition to registered capital requirements, the central bank can deem that a company needs a license purely on supervisory grounds, 1 even if it doesn’t meet financial asset benchmarks. 2 They also cover market access, shareholders and risk management.
Ma has effectively given a nod to the central bank’s primacy after his firm was whipsawed Sunday by a PBOC statement saying it has “little legal awareness,” “despised” compliance requirements and engaged in regulatory arbitrage.
Based on Ant’s IPO document and the mention of regulation, this had to be coming, even if sooner than expected. But just as 2008 felt more restrictive than it ended up being and banks charted newer paths to profit, it’s likely that Ant will, too.
China Eyes Shrinking Jack Ma’s Business Empire
The state could take a bigger stake in the billionaire’s businesses as regulators beef up oversight of the powerful tech sector.
Beijing is seeking to shrink Jack Ma’s technology and financial empire and potentially take a larger stake in his businesses, according to Chinese officials and government advisers familiar with the matter, as regulators zero in on the billionaire in a campaign to strengthen oversight of an increasingly influential tech sphere.
Under a restructuring road map that China’s financial regulators laid out this week, financial technology giant Ant Group Co. would return to its roots as an online-payment provider akin to PayPal Holdings Inc., while its more profitable investment and loan businesses would be curtailed.
The regulators, led by the central bank, also ordered Ant to form a separate financial holding company that would be subject to the kind of capital requirements applied to banks. That could open a door for big state banks or other types of government-controlled entities to buy into the firm to help beef up its capital base, the officials and advisers say.
China’s national pension fund, China Development Bank and China International Capital Corp. , the country’s top state-owned investment bank, are already investors in Ant.
Mr. Ma, China’s richest person, has helped define China’s new economy with the two companies he founded—Ant and its e-commerce affiliate Alibaba Group Holding Ltd. Their businesses span payment services, online retail, cloud computing, wealth management and lending. Separately, Alibaba is facing an antitrust probe that could also lead to an overhaul of its business and asset divestitures.
The People’s Bank of China and the State Administration for Market Regulation, which regulate Ant and Alibaba, didn’t respond to requests for comment. Ant declined to comment. Mr. Ma and Alibaba didn’t immediately respond.
But in targeting Mr. Ma, China’s leaders face a tough balancing act, trying to keep entrepreneurs like him in check—without hurting the innovative spirit that has helped power China’s technological and economic rise.
“No question the purpose is to rein in Ma Yun,” said an adviser to the anti-monopoly committee of China’s State Council, the country’s top government body, using Mr. Ma’s Chinese name. “It’s like putting a bridle on a horse.”
It’s hard to overestimate the role Mr. Ma’s companies have played in China’s economy. Ant and Alibaba together have allowed hundreds of millions of Chinese consumers and businesses to make a purchase, deposit money, execute an investment or take out a loan with a swipe of the thumb.
Having benefited until most recently from a relatively light regulatory touch, Mr. Ma’s companies have come to challenge the state sector’s dominance in areas such as banking and money management.
But the days of laissez-faire are over. Authorities in recent months have pledged to toughen regulation over an internet sector that is growing in size and impact.
While some other companies are also under scrutiny, including popular social-media app WeChat operator Tencent Holdings Ltd. and ride-hailing firm Didi Chuxing Technology Co., regulators for now are focusing their attention on Mr. Ma and his companies.
Mr. Ma, flashy and outspoken, has long clashed with regulators, particularly those at the People’s Bank of China, who have become wary of a sprawling empire that they fear is running amok and tried to impose restrictions.
The tension came to a head in late October when Mr. Ma openly criticized leader Xi Jinping’s signature risk-control initiative, while also slamming regulators for stifling innovation—in a speech that took place just days before Ant, in which he is the controlling shareholder, was set to go public.
Before the speech, Mr. Xi had paid little attention to Ant’s planned IPO, according to a person with knowledge of the regulatory process. “Thanks to Ma himself, the IPO got on Xi’s radar,” the person said.
Mr. Ma’s attack on regulators quickly backfired. It led Mr. Xi to personally call off the initial public offering, which was expected to be the biggest ever and would have valued Ant at more than $300 billion, and to instruct regulators to look into risks posed by Mr. Ma’s empire.
Since then, China’s market and financial regulatory agencies have sprung into action. Officials are particularly concerned about how Ant uses data harnessed by its Alipay payment app to encourage banks to work with the company in making consumer and small-business loans. Ant only funds a fraction of the loans, with the bulk of the funds coming from the banks, leaving them with the credit risks.
But even Mr. Xi, the most powerful leader in recent Chinese history, faces constraints in how far his government can go to clamp down on Mr. Ma’s empire.
Chief among them is avoiding the perception of dealing a significant blow to entrepreneurship at a time when the private sector is seen to be losing ground to state-owned firms. In addition, the leadership is worried about a backlash from international investors at a time when Beijing wants to fend off growing doubts over its commitment to market reforms and to nurture more homegrown companies like Alibaba that can compete with their American counterparts.
To allay fears of the state overreaching, the officials said, authorities chose a deputy central-bank governor with a pro-market reputation to detail the actions against Ant this week in a publicized question-and-answer statement.
Pan Gongsheng, the deputy governor who previously oversaw the share sales for two of China’s biggest state-owned banks before moving to the People’s Bank of China, urged Ant to overhaul its business based on market and legal principles.
Still, Mr. Pan emphasized the need for the company to “integrate corporate development into overall national development,” according to remarks released by the central bank on Sunday.
Ant said in a statement Sunday that it would comply with regulatory requirements and develop a plan and timetable for the ordered overhaul. At a November meeting with regulators, Mr. Ma offered to have the government “take any platforms Ant has, as long as the country needs it,” in an apparent effort to salvage his relationship with Beijing. Mr. Ma hasn’t appeared in public since his October speech.
Meanwhile, China’s market regulator last week launched an antitrust investigation into Alibaba, which owns a third of Ant, for allegations that the company has used its dominant market position to pressure merchants to sell only on its platforms.
Officials are also concerned about Alibaba’s threat to traditional bricks-and-mortar retailers. “We’ve received lots of complaints about Alibaba squeezing out smaller rivals and its internet platforms taking away business from others,” a regulatory official with knowledge of the investigation said.
Wang Fuqiang, who owns a laptop store in Beijing, is among those who have felt the pinch. Mr. Wang’s store has seen sales drop steadily as more people shop on Taobao, an online shopping site owned by Alibaba, and JD.com Inc., another large e-commerce player.
“Now, most buyers come to my store to try the laptops and take pictures,” said Mr. Wang, who has been running the store for 17 years. “Then, they would leave and buy it online.”
China Orders Billionaire To Lie Low After Poem Post Sparks Fury
China’s government summoned Meituan’s Wang Xing to a meeting recently and warned him to keep a low profile, after the founder of China’s third-largest tech corporation last month posted a controversial poem that convulsed markets and sparked a social media furor.
Beijing officials called Wang in after the food delivery mogul posted a millennium-old poem regarded by many as implicit criticism of the government, according to people with knowledge of the matter. They warned him to refrain from courting the spotlight, at least temporarily, the people said, asking not to be identified as they weren’t authorized to discuss the matter.
The Tang Dynasty poem — describing the burning of books under China’s first emperor — was widely seen as anti-establishment and triggered a $26 billion selloff in Meituan’s shares over two days.
While the CEO later issued a clarification saying his post had been targeted at the short-sightedness of his own industry, some investors drew parallels to the criticisms issued by Alibaba Group Holding Ltd. founder Jack Ma against regulators last year, which triggered an unprecedented crackdown on China’s internet sector. The officials however indicated to Wang that no further fallout will result from the incident, the people said.
Shares of Meituan initially pared more than half their gains in afternoon trade, but recovered to end 3.7% higher on Friday. The company didn’t respond to a written request for comment.
Like Alibaba previously, Meituan is grappling with a probe by the state antitrust watchdog into alleged monopolistic behavior such as merchant exclusivity, which some analysts have estimated could result in fines of over $700 million.
Officials refrained from taking more severe action against Wang because they didn’t want to convey the impression that every minor transgression could result in dire consequences, one of the people said. The incident transpired less than two months before the Chinese Communist Party is poised to celebrate the 100th anniversary of its founding on July 1, a politically sensitive period in the country.
The entrepreneur has since stayed under the radar. Since Wang posted the statement clarifying his intentions on May 9, he’s abruptly stopped posting to his account on Fanfou, the social media platform he created before Meituan. Prior to the controversy, he updated his account at least several times a week.
The billionaire — who had a reputation for being comparatively media shy, even before the incident — hasn’t been seen nor heard in public beyond a brief appearance on Meituan’s quarterly earnings call in May. His donation of a $2.3 billion stake in the food delivery giant to charity — one of the largest single acts of philanthropy during the pandemic — was revealed through a company disclosure statement to the Hong Kong Stock Exchange, in lieu of a personal announcement.
Beijing is now focusing its efforts on a broader investigation, announced in April, into whether Meituan violated anti-monopoly laws through practices such as forced exclusivity arrangements. Meituan executives said last month it’s set up a dedicated team to work with officials conducting the probe, and vowed strict compliance with new guidelines.
Wang’s fate contrasts with that of Alibaba’s Ma, whose business empire came under sustained assault from regulators. His fintech giant Ant Group Co. was forced to scrap what would have been a record initial public offering, while Alibaba was slapped with a $2.8 billion fine for antitrust violations, the largest such penalty ever.
Ma is also under pressure to divest some of his media holdings, people familiar with the matter have said, and the flamboyant businessman hasn’t been seen in public beyond a handful of low-key appearances.
U.S. Carrier Group Enters South China Sea Amid Taiwan Tensions
The U.S. military said the carrier strike group was in the South China Sea to conduct routine operations “to ensure freedom of the seas.”
A U.S. aircraft carrier group led by the USS Theodore Roosevelt has entered the South China Sea to promote “freedom of the seas,” the U.S. military said on Sunday, at a time when tensions between China and Taiwan have raised concern in Washington.
U.S. Indo-Pacific Command said in a statement the strike group entered the South China Sea on Saturday, the same day Taiwan reported a large incursion of Chinese bombers and fighter jets into its air defence identification zone in the vicinity of the Pratas Islands.
Eight Chinese bomber planes and four fighter jets entered the zone, and Taiwan’s air force deployed missiles to “monitor” the incursion, the island’s defense ministry said, prompting the U.S. State Department to urge China to stop pressuring Taiwan.
The U.S. military said the carrier strike group was in the South China Sea, a large part of which is claimed by China, to conduct routine operations “to ensure freedom of the seas, build partnerships that foster maritime security.”
“After sailing through these waters throughout my 30-year career, it’s great to be in the South China Sea again, conducting routine operations, promoting freedom of the seas, and reassuring allies and partners,” Rear Adm. Doug Verissimo, commander of the strike group, was quoted as saying.
“With two-thirds of the world’s trade travelling through this very important region, it is vital that we maintain our presence and continue to promote the rules-based order which has allowed us all to prosper,” Verissimo said in the statement.
The announcement comes just days after Joe Biden was sworn in as U.S. president.
Biden’s nominee for secretary of state, Antony Blinken, told his Senate confirmation hearing on Tuesday there was “no doubt” China posed the most significant challenge to the United States of any nation.
China has repeatedly complained about U.S. Navy ships getting close to Chinese-occupied islands in the South China Sea, where Vietnam, Malaysia, the Philippines, Brunei and Taiwan all have competing claims.
The Theodore Roosevelt is being accompanied by the Ticonderoga-class guided-missile cruiser USS Bunker Hill, and the Arleigh Burke-class guided-missile destroyers USS Russell and USS John Finn, the U.S. statement said.
In a bold movement on Friday, China authorized its coast guard to fire on foreign vessels and destroy structures on features it claims, potentially raising the possibility of clashes with regional maritime rivals.
The Coast Guard Law empowers the force to “take all necessary measures, including the use of weapons, when national sovereignty, sovereign rights and jurisdiction are being illegally infringed upon by foreign organizations or individuals at sea.”
The law also authorizes the coast guard to demolish other countries’ structures built on reefs and islands claimed by China and to seize or order foreign vessels illegally entering China’s territorial waters to leave.
Jack Ma’s Ant In Talks To Share Data Trove With State Firms
The fintech giant is in discussions to start a new credit-scoring business with Chinese state-owned enterprises.
Ant Group Co. is in talks with Chinese state-owned enterprises to create a credit-scoring company that will put the fintech giant’s proprietary consumer data under regulators’ purview, according to people familiar with the matter.
The new entity, which could be established as soon as the third quarter of this year, could result in Ant ceding some control over the voluminous data it has on the financial habits of Chinese citizens. More than one billion individuals use Ant’s Alipay app to spend, borrow or invest their money, and the information that Ant has collected and used has been the secret sauce behind the company’s success in recent years.
The talks between Ant, which is controlled by billionaire Jack Ma, and Chinese state-owned companies are likely to result in the formation of a joint venture that would be licensed as a credit-scoring company. Ant and regulators have also been discussing whether the firm should be run and controlled by Ant or state-owned companies, according to people familiar with the matter.
The regulators are pushing for prospective state-owned shareholders to play a greater role in the new entity in order to have a bigger say in how it operates, according to some of the people familiar with the negotiations. Potential shareholders include a Shanghai-based financial conglomerate.
There have also been talks about what sort of data would be collected by the new firm, and how the credit scores it produces would fit into China’s broader plans to build a nationwide database, the people added.
The discussions are continuing and final decisions haven’t been made, the people said.
An Ant spokesman declined to comment on plans for the credit-scoring business. The People’s Bank of China, which is overseeing a broader overhaul of Ant, didn’t respond to requests for comment.
The new venture with state-backed investors would override Ant’s previous attempts to spearhead a national credit-scoring system under its own brand, Zhima Credit, which it started six years ago. Ant once had ambitions of using Zhima—previously known as Sesame Credit—to provide credit scores for most of China’s population, but those hopes were dashed, reducing the division to what is in essence a loyalty program for Alipay users.
For all of China’s world-beating advances in mobile payments and financial technology, the country has lacked a robust national credit-scoring system akin to America’s FICO, whose scores are used by many lenders and are based on individuals’ borrowing and repayment histories from a variety of sources.
The PBOC runs a Credit Reference Center that collects credit information about individuals and companies from banks and other financial institutions. But it lacks data on many people who don’t qualify for traditional bank loans.
Over the last decade, Ant and other fintech companies ramped up lending to much of China’s population, but the information they gathered on individuals was largely kept within their own systems.
Until recently, Ant had resisted pressure from financial regulators to share its data or feed it into a central repository accessible by other financial institutions, saying that it didn’t have its users’ consent to do so.
The tables have now turned, following the cancellation of Ant’s initial public offering and a broader regulatory crackdown on China’s technology giants. By strengthening its grip over Ant, Beijing is also trying to put a stop to what it considers excessive data collection and lax consumer-privacy protection.
Ant in April said it would restructure into a financial-holding company overseen by China’s central bank. It pledged to get its payments, lending, wealth-management and other operations fully regulated, and said it would set up a company that will apply for a personal-credit reporting license.
Earlier this month, Ant started a consumer-finance company that also counts state-owned and private enterprises as shareholders. That firm will change the way Ant funds and makes some of its short-term loans.
Ant, whose Alipay platform handled the equivalent of more than $17 trillion worth of payment transactions and originated loans to more than a third of China’s population in the year to June 2020, has collected troves of consumer data for years.
The company in 2015 launched Sesame Credit, then changed the name to Zhima, the Mandarin word for Sesame. Ant said its aim was “to help the hundreds of millions of Chinese consumers and businesses who have little or no formal credit history establish their trustworthiness in a commercial setting.”
Mr. Ma, who founded Alipay’s original parent Alibaba Group Holding Ltd., had high hopes for the division, whose name was similarly inspired by the folk tale “Ali Baba and the Forty Thieves.” In it, the magical phrase “Open Sesame” revealed the entrance to a cave where thieves had hidden a treasure.
Around that time, the PBOC invited eight private companies, including Zhima and Ant’s rival Tencent Holdings Ltd. , to pilot their own credit-scoring systems. That set off a race by the companies to build what they hoped would eventually be adopted as the country’s premier credit-monitoring database.
Zhima expanded aggressively, hiring people from companies like Equifax to build a risk-assessment and scoring system that could be connected to thousands of financial institutions such as banks, consumer-finance companies and online lenders.
Zhima’s credit-scoring metrics incorporated more than people’s borrowing and payment histories into its assessments. It also analyzed alternative data such as individuals’ online social networks and purchasing habits, which are considered complementary to information about car loans and mortgage debt.
In early 2016, Mr. Ma made Zhima his first stop during a post-Lunar New Year visit to Ant’s Hangzhou headquarters. In a pep talk to staffers, he proclaimed that “Zhima shall be adopted in every household,” according to a person who was there.
Inspired, the Zhima team accelerated the rollout. Between June and September that year, it connected to more than 300 nonbank financial institutions such as peer-to-peer lending platforms that were mushrooming across China, according to people familiar with the matter. It also supplied its credit scores to dozens of commercial banks and in return, some of them provided it with loan data and default information, the people said.
The industry expected the PBOC to hand out credit-scoring licenses after the pilot program ran its course.
That never happened. In 2017, regulators stepped up a crackdown on peer-to-peer lending platforms after some of them turned out to be scams or lacked proper risk controls.
The PBOC also decided it no longer wanted a nationwide credit-scoring system run by private companies with profit motives. A central-bank official told a state-owned media outlet at the time that the firms weren’t willing to share information and had conflicts of interest as well as a poor understanding of how to do credit scoring.
Instead, the central bank in early 2018 issued a three-year license to a new government-led company called Baihang Credit Scoring. The eight companies that were previously asked to build their own systems were told to suspend those efforts and were each given an 8% stake in Baihang, with the remaining 36% held by a government-affiliated entity. They were all asked to feed data into Baihang to help build a national credit-scoring database.
It was another failed effort, because some of the companies didn’t want to contribute data that their rivals could benefit from.
“There was no way Ant was going to share all this with a company in which it had only an 8% stake, so that most of the benefits of the data would potentially go to other companies,” said Eswar Prasad, a former China head of the International Monetary Fund and a professor at Cornell University.
With its ambitions curtailed, Zhima’s relevance began to fade. Ant changed its mission and made it more akin to a loyalty program for Alipay users. People with high Zhima scores could enjoy perks such as deposit-free hotel bookings and rentals of cars, bicycles and mobile power banks. The Zhima team shrank, becoming a shadow of its former self, according to people familiar with the matter.
In January this year, the central bank put out a draft rule to “strengthen the supervision and management of credit-scoring businesses.” It said such firms would require licenses to operate legally.
Zhima won’t be part of the new credit-scoring company that Ant is likely to set up with state-owned firms, according to people familiar with the matter. The new entity would have access to the same data used by Zhima, and after it is formed Ant would exit its position as a shareholder in Baihang, the people added. Baihang’s credit-scoring license expired in January, according to a regulatory filing. Baihang didn’t respond to a request for comment.
At the end of the day, Ant will have to share some of its consumer data with other institutions because “it’s a matter of public interest,” said He Zhiguo, a professor of finance at the University of Chicago.
China Crushed Jack Ma, And His Fintech Rivals Are Next
Ant has lost at least $70 billion in value since its scuttled IPO, and companies from Tencent to JD.com are under pressure, too. The winners? The country’s state-backed banks.
It’s been eight months since Jack Ma, the most famous business executive China has ever produced, all but dropped from public view. Eight months and, by conservative estimates, some $70 billion.
That’s the optimistic view on how much Ma’s Ant Group Co. has plummeted in value since the outspoken billionaire openly pushed back against Beijing—and Chinese authorities promptly quashed Ant’s plans for a blockbuster initial public offering.
Inside Ant, the financial-technology giant Ma spun out of Alibaba Group Holding Ltd., the real costs are still being tallied.
Followers of “Daddy Ma,” China’s answer to Jeff Bezos, have been brought to heel by higher powers: China’s president, Xi Jinping, and his right-hand man on the economy, Liu He.
A team from the nation’s top financial regulators now demand regular updates from Ant Chief Executive Officer Eric Jing and his staff on the progress of a state-ordered business overhaul, according to people familiar with the matter. New initiatives must be vetted by officials. And authorities have discussed installing a government representative in Ant’s senior executive ranks to keep tabs on the company, says one of the people, who asked not to be identified speaking on a sensitive issue.
So it goes across big tech in China, where freewheeling, internet-age capitalism, and the wealth and influence it brings, has collided with the aims and ambitions of the Chinese Communist Party. What regulators describe as “rectification” is under way, and it’s also affecting the finance operations of Tencent Holdings Ltd., JD.com Inc., TikTok owner ByteDance Ltd. and ride-hailing giant Didi Chuxing. U.S. and European officials have been wondering for years what to do with the big tech companies that have amassed so much power. China’s answer is to assert control.
In fintech, that means forcing upstarts like Ant to behave more like old-fashioned banks. It also means tipping the balance of power in the nation’s huge, debt-ridden financial industry back toward well-connected state-owned banks that toe the party line. Beijing says China’s big Internet and fintech companies have abused their market power. Xi wants to bridle innovators without strangling innovation and reduce financial risks without diminishing economic rewards. The question is, can he?
Ant and its peers have taken some hard blows. Regulators have worked to check their influence, and the future is looking a lot less profitable.
Lending online to hundreds of millions of Chinese, the biggest engine of growth, is forecast by Bloomberg Intelligence to shrink 23% over five years, as will money flowing to investment products sold by fintech platforms. The payments ecosystem will now be closely policed. “We are entering a period of major upheaval as Beijing reshapes its relationship with tech giants—expect tighter controls to stay here long-term,” says Beijing-based Liao Ming, a founding partner of Prospect Avenue Capital, which manages $500 million in assets. “Beijing’s priorities have shifted.”
The trouble began in October, when Ma publicly lambasted global financial regulators and conventional bankers. He said they were out of touch and stifled innovation. In a little over a week, the Ant IPO was put on ice. Authorities have since issued new rules on everything from consumer lending to leverage to monopolies in online payments. Regulators and state media have tapped into strands of popular resentment toward China’s hyper-wealthy moguls, criticizing the companies for miring the poor and the young in debt.
More than a dozen technology companies have been told they may need to restructure their financial divisions into entities that will be more like banks and supervised by the People’s Bank of China. Everything from how consumer data is collected and used, to how loans get made, and to whom, is under scrutiny, as are overseas listings and ownership structures.
First up is Ant. Its most-lucrative business—extending small online loans to shoppers in partnership with banks—is now capped at less than 300 billion yuan ($46.4 billion) under a newly licensed unit, from more than double that and growing a year ago, Jefferies’ Hong Kong-based analyst Shujin Chen estimates. Adding to the strain, state banking partners are pulling back from fintech at the behest of regulators. “The power dynamics have shifted in that state entities will be ever-more vigilant of fintech activities,” says Joel Gallo, CEO of Guangzhou-based consulting firm Columbia China League Business Advisory Co.
More pain lies ahead. Ant and rival Tencent have been told to sever the “improper links” that long steered a billion users of their ubiquitous payment apps—Ant’s Alipay and Tencent’s WeChat Pay—toward higher-paying services such as loans and fund management. Regulators have yet to rule on how the two companies, which dominate mobile payments, can direct traffic on their apps and use the wealth of data they gather.
And the PBOC is weighing new rules for curbing monopolies in online payments, while at the same time trying to launch a venture that would take charge of the data those platforms collect and share it with rivals. “The Chinese government implemented regulations too little, too late to prevent Alipay and Tencent’s payment business from dominating the industry,” says Singapore-based Zennon Kapron, managing director of consulting firm Kapronasia. “Although they are homegrown champions, the Chinese government prefers a more balanced market.”
The sudden turn in fortunes is brewing discontent. A number of Ant employees, including senior executives, are actively hunting for other jobs as they become concerned about the dwindling value of their stock options, says Lion Niu, director at Beijing-based recruitment company CGL. Jing, who took the reins after former CEO Simon Hu unexpectedly resigned in March, has promised employees that the company will eventually go public.
But what the recent upheaval will mean for the company’s valuations is still unknown.
Earnings multiples of traditional finance companies would value Ant somewhere between $29 billion and $115 billion, according to Bloomberg Intelligence analyst Francis Chan. That’s well below the $320 billion that it was expected to fetch last year. Ant’s early investors are more positive. Fidelity Investments, which owns 0.14% of Ant, has halved its estimate to about $144 billion at the end of February from $295 billion earlier. Warburg Pincus, with a 0.33% shareholding, has pegged it somewhere between $200 billion to $250 billion.
Shares of Alibaba, which owns about a third of Ant, have slumped almost 30% since early November.
The stakes are high. In March, Tencent plunged on a Bloomberg News report that it would have to fold its financial business into a holding company, supervised by the central bank. About $37 billion of market value was wiped out in a day. Two months later, local media reported that regulators had called for the overhaul.
JD Technology, an arm of JD.com, China’s No. 2 e-commerce site by net income, is waiting for clear instruction from the authorities before making any attempt to push deeper into finance, according to a person familiar with the matter. JD was widely ridiculed last year after it ran an ad showing a low-income worker borrowing money to pay for an airline upgrade. Some called for a customer boycott. Representatives for Ant and Tencent declined to comment, while JD Technology, the PBOC and China’s banking regulator didn’t respond to requests for comment.
“The rules foisted upon fintechs have taken off some of the luster of invincibility they have enjoyed,” says Gallo. Meanwhile, the big banks are pressing their advantage. Last year, they collectively invested a record $31 billion in fintech. At Industrial & Commercial Bank of China Ltd., the world’s largest bank by assets, spending jumped 40%. ICBC hired 800 people in technology, bringing its total workforce in that one area to 35,400. Its banking app increasingly mimics Alipay, bundling travel, entertainment, and dining options, with a host of financial services for its 416 million users.
Shares of China Merchants Bank, the retail banking leader, have soared almost 60% since Ant’s IPO was suspended. Ant was told to shrink its money-market fund, once the world’s largest. At the same time, Merchants Bank, based in the tech hub of Shenzhen, has opened investment products once reserved for the rich to mass-market clients with as little as 100,000 yuan to invest. Its retail assets under management climbed by a record of 650 billion yuan in the first quarter, to 9.6 trillion yuan.
Traditional banks in China have long struggled to size up customers who don’t have collateral or credit histories. Platforms like Ant helped revolutionize lending by crunching reams of new data from their payment systems, social media, and other sources to evaluate creditworthiness.
Even when regulators ordered 13 top platforms to rein in their finance operations, they acknowledged the crucial role fintechs have played in improving efficiency and access and lowering transactions costs. “The intent is not to kill them,” Bernstein analyst Kevin Kwek says of the fintechs.
Ordinary people in China are hungry for loans. Yang Mei operates a small beauty parlor in the southwestern city of Chengdu. The 30-year-old got a 5,000 yuan loan via Ant last September to help pay for various beauty products. The rate: 185 yuan for three months, the rough equivalent of a 14.8% annual rate, which she calls “reasonable.” She hoped to get another loan to fund an expansion but put those plans on hold after Ant was forced to restrict lending. She says she’s reluctant to borrow elsewhere because she trusts the Ant brand.
Li Lin, who owns a food processing factory in Sichuan province that churns out dairy products and hotpot sauce, says he’s having a hard time getting loans from state-owned banks. He says even local banks are stingy with small business owners, who aren’t considered prime clients. Li, 40, says he and fellow entrepreneurs continue to use small online lenders that fly under the radar of regulators and charge usurious rates pegged to the principal even after half the loan is repaid.
“It’s been extremely hard for small companies to get financing from state banks, and loan costs for us are very high,” says Li. “It makes conducting business very challenging.”
Didi Dives As China Unveils New Cyber Probe After Mega IPO
Didi Global Inc. tumbled Friday after China said it’s starting a cybersecurity review of the ride-hailing company just two days after it pulled off one of the biggest U.S. stock market debuts of the past decade.
The move is to prevent data security risks, safeguard national security and protect public interest, according to a statement from the Cyberspace Administration of China. Didi has halted new user registrations during the probe. The company, which only started trading on Wednesday in New York after an initial public offering, fell 7% to $15.26.
The surprise probe by China’s internet regulator piles on the scrutiny of Didi over issues ranging from antitrust to data security. The company has been grappling with a broad antitrust probe into China’s internet firms with uncertain outcomes for Didi and peers like major backer Tencent Holdings Ltd.
More broadly, Beijing has been curbing the growing influence of China’s largest internet corporations, widening an effort to tighten the ownership and handling of troves of information that internet giants from Alibaba Group Holding Ltd. to Tencent and Didi scoop up daily from hundreds of millions of users.
Didi lost as much as 11% of its market value at one point on Friday, a rapid turnaround that underscores the uncertainty surrounding the Chinese government’s crackdown on the internet sector. Earlier this year, the State Administration for Market Regulation announced it was looking into alleged abuses including forced merchant exclusivity arrangements at Meituan, days after China’s third-largest internet company raised $9.98 billion from a record share placement and convertible bonds sale.
“This is deeply unfair to investors,” said Brock Silvers, chief investment officer at Hong Kong-based private equity firm Kaiyuan Capital. “And as a crucial matter of market integrity, China’s regulators should cease allowing companies to list while under investigation.”
The CAC didn’t specify what it will look into. But the timing of its announcement was significant, coming not just on the heels of Didi’s IPO but also the Communist Party’s 100th anniversary celebrations in Beijing.
“Didi will fully cooperate with the relevant government authority during the review,” the company said in a statement. “We plan to conduct comprehensive examination of cybersecurity risks and continuously improve on our cybersecurity systems and technology capacities”
Founded in 2012 by Cheng Wei, Didi managed to force a retreat of its U.S. rival Uber Technologies Inc. in 2016 and embarked on an ambitious international expansion. Its U.S. IPO was highly anticipated and marked the second-biggest debut by a Chinese company, trailing only Alibaba.
Didi has faced regulatory scrutiny ever since a pair of murders in 2018 that Cheng has called its “darkest days.” The Beijing-based firm responded to the subsequent crackdown with a fusillade of efforts to improve security across its network of half a billion.
It began to explore new businesses to offset slowing ride-hailing growth, from car repairs to grocery delivery. That served it well during the coronavirus pandemic, when whole cities came to a standstill. The company delivered an $837 million profit in the March quarter — a rarity among recent high-profile IPOs.
The company, which was among 34 internet giants ordered by regulators in April to correct ‘excesses,’ warned in a regulatory filing that it couldn’t assure investors that government officials would be satisfied with its efforts or that it would escape penalties.
China Orders Ride-Hailing Firm Didi’s App Removed From App Stores
Move comes two days after Chinese regulators blocked firm from adding new users over cybersecurity concerns.
China ordered app-store operators to remove the app of ride-hailing giant Didi Global Inc.’s China arm, saying it has serious problems involving illegal collection of personal data.
The Cyberspace Administration of China also ordered Didi Chuxing, the company’s China business, to address the issues according to relevant Chinese standards and to ensure the safety of the personal information of users.
Beijing’s latest order comes just two days after regulators blocked the company from adding new users as regulators reviewed the company’s cybersecurity.
Didi said current users who had already downloaded the app wouldn’t be affected by the move.
“We sincerely thank the responsible departments for guiding Didi to look into the risks,” Didi said in a statement posted on Weibo, a Twitter -like platform. Didi also promised to “conscientiously rectify” the issues.
Didi’s China Probe Adds To Business Challenges At Home And Abroad
Tech giant under regulatory scrutiny is struggling to move beyond its dependence on ride-hailing in China.
China’s regulatory action against Didi Global Inc. DIDI -4.64% threatens to impinge on the Chinese ride-hailing behemoth’s growth as it faces increasing competition at home and struggles to expand into new countries and new lines of business.
While the Beijing-based company’s U.S. initial public offering valued it recently at more than $67 billion, Didi faces a raft of challenges even as economies around the world bounce back from the pandemic. It is seeking to stay in the black after years of losses from burning cash to win customers.
Didi reported a quarterly profit of about $800 million in the first three months of this year, most of that because of its market dominance and concentration in China. That commercial strength may now weigh on its prospects as the company comes under regulatory scrutiny at home, analysts say.
On Sunday, the country’s internet watchdog, the Cyberspace Administration of China, ordered mobile app stores to remove Didi’s China app. Two days earlier, the same regulator launched a cybersecurity review of the company. Didi didn’t respond to a request for comment on the impact of the move on its business.
More than 90% of Didi’s first-quarter revenue came from ride-hailing in China, according to its listing prospectus. Rival Uber Technologies Inc.’s core ride business, by contrast, accounted for just 29% of its first-quarter revenue; food delivery brought in 60%.
Didi has struggled to diversify into new growth areas. The Chinese company made a push into food delivery in China in the past, but failed to gain much traction in the face of strong market incumbents.
Even in its core business, Didi has faced increasing competition at home from startups offering niche offerings such as luxury car-hailing.
Didi had 96% of China’s ride-hailing market in 2018, according to researcher Deloitte. In recent years, rivals have whittled that down to around 80% to 90%, according to Cherry Leung, an analyst at Sanford C. Bernstein in Hong Kong. She estimates that Didi could lose about 6 million new customer installs over the period of the data-security investigation, assuming the probe lasts the standard duration of six weeks.
Didi’s existing troubles are an invitation for rivals to try to steal market share in an industry where Chinese customers are less loyal to brands and highly price sensitive.
“Many competitors are looking for the right opportunity to play offense,” said Tu Le, managing director of advisory firm Sino Auto Insights. “Before this, Didi was a healthy company. Now, they are wounded.”
Chinese automakers such as Geely Automobile Holdings Ltd. and FAW Group and its technology peers Alibaba Group Holding Ltd. and Meituan have sought to diversify growth by jumping into the ride-hailing industry. Car-hailing rivalries have captivated Chinese consumers in the past, with steep discounts dangled to woo users, sometimes bringing the cost of a trip of more than three miles to less than $2.
This week, Jennifer Hu, a staffer in a law firm in Shanghai, received a call from Meituan for the first time, offering 50% off trips of more than 20 yuan, equivalent to $3.09, for existing users like her.
Didi’s prospects for expansion and profitability outside of China are bleak, given increased competition and changing labor laws, said Kyle Guske, an investment analyst at equity research firm New Constructs.
The recent investigation makes the task only more challenging, since its international competitors won’t have to deal with similar issues, and the episode could lead to a loss of confidence in the app’s usability, said the Brentwood, Tenn., analyst.
In its prospectus, Didi said it was the second-largest ride-hailing platform in Latin America, citing data from China Insights Industry Consultancy Ltd. and iResearch Consulting Group. Didi has 493 million active users globally, with users in 16 countries beyond China accounting for 12% of that number.
Didi now faces potential lawsuits from several U.S. law firms acting on behalf of investors, who allege that Didi may have issued misleading business information prior to its listing.
Didi raised $4.4 billion in its IPO, but after it came under the scrutiny of regulators, its shares tumbled 19.6%, falling below the IPO price. Weeks before Didi went public, Chinese regulators had suggested that the company delay its IPO, people familiar with the matter said.
Didi’s new regulatory troubles come as it tries to escape the impact of the pandemic, which was less severe in China but still cut the company’s revenue last year by 8.4%, to 141.74 billion Chinese yuan, equivalent to $21.9 billion. Some 94% of that came from China mobility services.
Didi’s fall from grace is noteworthy given that the company was once heralded as a source of national pride. In 2015, the scrappy technology startup headed by internet entrepreneur Cheng Wei, who is now 38 years old, took on Uber in a battle for China’s ride-hailing market. After a bitter price war, the Chinese company acquired Uber’s China operations in 2016 in a share swap.
As a privately held company, Didi was also one of China’s most valuable technology unicorns, and highly sought after by investors. Its backers include Softbank Group Corp , Apple Inc., and Alibaba.
At home, the company has branched out into bike-sharing and logistics. Its flagship China app provides services including home moves and financial loans, though these represent only a tiny fraction of its overall business.
Even so, analysts say that Didi’s current dominance in many of China’s largest cities may cushion the impact. Didi also runs Huaxiaozhu Dache, a second ride-hailing app that is targeted at consumers in lower-tier cities and is still available on Chinese app stores.
The main Didi app has already been downloaded by many Chinese smartphone users, and the banning of new users is unlikely to have a big impact, said Sumeet Singh, head of IPO research at Aequitas Research.
“Given its market dominance, it’s a given that anyone who uses ride-sharing services in China probably already has Didi on their smartphone,” said Mr. Singh.
China’s Didi Crackdown Is All About Controlling Big Data
Shortly after Beijing’s shock cybersecurity probe into Didi Global Inc., Chinese social media users furiously passed around a 2015 story on the Uber-like app that showed what might be spooking President Xi Jinping.
Screenshots circulated of a breezy state media report on a Didi study that revealed how bureaucrats used the company’s services on two sweltering July days in Beijing. Using playful charts, it showed that traffic at the Ministry of Public Security was among the busiest, while China’s anti-corruption agency was relatively quiet.
At the time, it looked like an innocuous peek at the potential of Big Data to make the government more efficient. Yet six years later it clearly shows the risk that an outside party—and perhaps foreign spies—could glean valuable intelligence from Didi about some of the country’s most important officials.
Didi’s listing in the U.S. last week came just as Xi is looking for ways to control the vast reams of data held by China’s tech giants, in part to ensure the Communist Party spreads the wealth beyond a small circle of billionaires. That scrutiny awoke regulators in Beijing to the threat posed by private companies, prompting them to ban Didi from signing up new users days after it conducted the second-biggest American initial public offering for a Chinese company.
More broadly, the crackdown shows how big data is quickly turning into the next major battleground in a clash of superpowers, with implications that potentially could reshape the global economy for decades to come. With the U.S. lobbying other nations to prevent China from obtaining technology like advanced computer chips and Xi undertaking a national project to develop them, stringent data security controls risk further disrupting supply chains, balkanizing financial markets and forcing countries to pick sides.
While neither the U.S. or China say they want economic decoupling, failure to come to terms on what data can safely be shared could suddenly turn any “smart device” into a security risk. Still, the costs of failing to reach some sort of deal are high: China risks losing access to deep capital markets abroad that can finance its push for technological superiority, while U.S. companies could find themselves cut off from investing in one the world’s top growth engines.
“We are in a moment where security concerns have taken precedence, due in part to changing geopolitical dynamics, as well as the ‘unknowns’ surrounding data-driven technologies,” said Tom Nunlist, a policy analyst at Beijing-based Trivium China, which advises businesses. “The trade-off, broadly speaking, is that the focus on protection will slow down economic and technological development. The question is how the U.S. and China will navigate—and negotiate—the trade-off.”
Perhaps more than any other major country, China has sought to harness the potential of data to transform its economy. Some projections show China will hold a third of the world’s data by 2025, potentially giving it a big competitive advantage in areas like artificial intelligence that need lots of information to fine-tune algorithms and improve services.
For Xi, harnessing that data is key to maintaining political control. Not only can he use it to feed a vast surveillance state to snuff out dissent, but he’s also looking to create a market for data to unleash its value throughout the broader economy. That includes pouring $1.4 trillion into digital infrastructure like server centers, preparing laws regulating data use and seeking to strong-arm tech giants into sharing their enormous databases.
His challenge is doing all that without stifling the innovation that created more wealth over the past decade than any other sector.
“There’s been a lot of lip service in China about the power of data to drive growth into the future,” said Carly Ramsey, a Shanghai-based director with international consulting firm Control Risks. “But the question is how do you walk that fine line between control and development of using data. I don’t know if China has figured that out.”
The Communist Party is just now expressing alarm at how all that data could be used by its adversaries. The expansion of cybersecurity probes beyond Didi to two other companies that recently listed in the U.S.—Full Truck Alliance Co., a similar service for trucks, and Kanzhun Ltd., which owns an online recruitment platform—showed broader concerns about data falling into the wrong hands.
Even to experts, it’s not exactly clear why China views U.S. listings as a data security threat, particularly given U.S. intelligence agencies already have the ability to spy on communications around the globe. In orders from Beijing this week, the State Council and Cyberspace Administration of China didn’t specify what information might be exposed through floats on overseas bourses.
The main trigger appears to be U.S. legislation passed last year that would allow the Public Company Accounting Oversight Board to review audits of large Chinese firms from Alibaba Group Holding Ltd. to Baidu Inc. that trade on American exchanges. Beijing officials have been vocal about the potential national security threat from allowing U.S. regulators to pore over internal company documents and accounts—and they don’t appear worried about the long-term financial consequences of shunning America.
“While China hawks in Washington are seeking to deny China access to U.S. listings, Beijing is confident that there is more than enough money around the globe chasing returns to meet all their funding requirements while playing by China’s rules,” said Graham Allison, a professor at Harvard University’s John F. Kennedy School of Government, who wrote “Destined for War: Can America and China Escape Thucydides’s Trap?”
One major Chinese concern is that the U.S. disclosure rules could result in a data leak that provides more detailed information on the world’s second-biggest economy than official releases. “Such data could directly or indirectly reflect the population distribution, business hotspots, population flow, freight flow, and business operation,” Li Keshun, deputy head of a big data lab in the coastal province of Jiangsu, was quoted as saying in an article published this week by the Communist Party’s top disciplinary body.
The warning was similar to one published in a Chinese academic journal in January: “With the free flow of data, one country could do an accurate profiling of the social situation of another country as well as targeted intelligence collection and analysis, thus threatening the latter’s national security.”
“We don’t want American data in the hands of the Chinese Communist Party”
The U.S., for its part, is also concerned about how China could weaponize big data. President Donald Trump last year banned ByteDance Ltd.’s TikTok and Tencent Holdings Ltd.’s WeChat over similar fears, with Secretary of State Michael Pompeo saying “we don’t want American data in the hands of the Chinese Communist Party.”
While the Biden administration revoked the Chinese app bans last month, in part because they were challenged in court, the White House has ordered a review due later this year into what data would be considered too sensitive for China to access. That includes everything from personal health information to genetic information to “harm from access to large data repositories”—not unlike those held by China’s big tech firms.
The U.S. campaign to deny China key technology, including through export bans like the one that strangled Huawei Technologies Co.’s smartphone business, gives even more incentive for Beijing to ensure it has a way to stop IPOs from the likes of Didi if necessary.
Moreover, discouraging overseas listings will help Xi keep China’s biggest companies aligned with the party’s goals, as also seen through Beijing’s move last year to scuttle Ant Group Co.’s $35 billion dual listing in Shanghai and Hong Kong at the 11th hour.
“Keeping local technology champions closer to home in domestic capital markets increases the party-state’s leverage over them and strengthens incentives for firms to align themselves with the party’s interests,” said William C. Kirby, a professor of China Studies at Harvard University.
Regulators in Beijing are now planning rule changes that would allow them to block a Chinese company from listing abroad even if the unit selling shares is incorporated outside China, a well-trodden avenue for the country’s technology giants, people familiar with the matter told Bloomberg News. LinkDoc Technology Ltd. became the first known company to halt plans for a U.S. initial public offering after China’s crackdown, people familiar with the matter said on Thursday.
In an op-ed for the party-backed Global Times, Zhejiang University’s Fang Xingdong—a former internet entrepreneur who is a key opinion leader in China—said the U.S. listings represented a “huge hidden danger for national network security” because major shareholders “had their interests lying abroad.”
“The full activation of China’s cyber-security review mechanisms indicate that Chinese internet companies will officially bid farewell to the stage of barbaric growth,” he wrote on Thursday.
Alibaba, Ant, Tencent and Bytedance together employ almost half a million employees. The world’s largest food delivery empire Meituan has 569 million users covering 2,800 cities, connected by an army of one million delivery people. WeChat has a billion-plus users, and Didi has 377 million users and 13 million drivers in China.
“China is undergoing a broad sweeping review, reigning in anti-competitive market practices, maintaining financial system stability and ensuring national data security, which could impact every industry sector,” said Joel A. Gallo, chief financial officer at healthcare company ETAO International Group and adjunct faculty member at New York University.
Some investors see China’s moves as counterproductive. Thomas Hayes, chairman at Great Hill Capital in New York, said Beijing was hurting itself by restricting their best companies from raising capital abroad.
But the Chinese government sees it the other way around. Rather than hurting the economy, tighter oversight will prevent tech companies from growing too big and ultimately posing systemic risks to both the domestic and global economy, according to Chen Xi, a senior external advisor to the China Academy of Information and Communication Technology, a research group under the Ministry of Industry and Information Technology.
Moreover, he said, the U.S. and China will eventually find it’s in their interest to cooperate in reining in companies that seek to amass—and profit from—more and more data.
“China, the U.S. and other economies will benefit from these giants, but also continue to be in confrontation with them,” Chen said. “They could not deal with the problem alone. This is an important area for cooperation.”
China Considers Closing Loophole Used by Tech Giants For U.S. IPOs
Regulators in Beijing are planning rule changes that would allow them to block a Chinese company from listing overseas even if the unit selling shares is incorporated outside China, closing a loophole long-used by the country’s technology giants, according to people familiar with the matter.
The China Securities Regulatory Commission is leading efforts to revise rules on overseas listings that have been in effect since 1994 and make no reference to companies registered in places like the Cayman Islands, said the people, asking not to be identified discussing a private matter. Once amended, the rules would require firms structured using the so-called Variable Interest Entity model to seek approval before going public in Hong Kong or the U.S., the people said.
The proposed change is the first indication of how Beijing plans to implement a crackdown on overseas listings flagged by the country’s State Council on Tuesday. Closer oversight would plug a gap that’s been used for two decades by technology giants from Alibaba Group Holding Ltd. to Tencent Holdings Ltd. to attract foreign capital and list offshore, potentially thwarting the ambitions of firms like ByteDance Ltd. contemplating going public outside the mainland.
It would also threaten a lucrative line of business for Wall Street banks and add to concerns of a decoupling between China and the U.S. in sensitive areas like technology. Chinese firms have raised about $76 billion through first-time share sales in the U.S. over the past decade.
The changes are subject to approval by the State Council, the people said. The securities regulator plans to discuss potential revisions with firms that underwrite share sales, one of the people said.
The CSRC didn’t immediately respond to a fax seeking comment. Foreign Ministry Spokesman Wang Wenbin directed questions on VIE firms to the relevant authorities during a press briefing in Beijing. Bloomberg News reported on the potential rule tightening in May.
Pioneered by Sina Corp. and its investment bankers during a 2000 initial public offering, the VIE framework has never been formally endorsed by Beijing. It has nevertheless enabled Chinese companies to sidestep restrictions on foreign investment in sensitive sectors including the Internet industry.
The structure allows a Chinese firm to transfer profits to an offshore entity — registered in places like the Cayman Islands or the British Virgin Islands — with shares that foreign investors can then own.
While virtually every major Chinese internet company has used the structure, it’s become increasingly worrisome for Beijing as it tightens its grip on technology firms that have infiltrated every corner of Chinese life and control reams of consumer data.
Authorities so far have little legal recourse to prevent sensitive overseas listings, as with the recent Didi Global Inc. IPO, which went ahead despite requests for a delay from regulators.
The additional oversight could bestow a level of legitimacy on the VIE structure that’s been a perennial worry for global investors given the shaky legal ground on which it stands.
China’s heightened regulatory scrutiny is echoed by tightening in the U.S. Recent legislation requires companies listed on U.S. bourses to allow inspectors to review their financial audits. China has long resisted letting the U.S. Public Company Accounting Oversight Board examine audits of firms whose shares trade in America, citing national security interests.
The State Council said Tuesday that rules for overseas listings will be revised while publicly traded firms will be held accountable for keeping their data secure. China will also step up its regulatory oversight of companies trading in offshore markets, it said.
Under the revised rules, VIEs like Alibaba that have already gone public may need approval for additional share offerings in the offshore market, according to the people familiar.
The “political compromise” that allowed the VIE structure as a way around foreign ownership restrictions is “under serious threat,” said Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics, following the State Council’s statement. China “can now discourage its promising firms from listing abroad, which could boost its ambitions to develop financial markets on the mainland.”
One firm has already suspended its work helping two Chinese companies using the VIE structure to list overseas after being advised by regulatory officials that new rules are being put in place, according to a person with knowledge of the matter.
In recent days, China has intensified its crackdown on technology firms with the cyberspace regulator announcing a probe into Didi and pulling the company’s app from stores. Shares in Didi, which controls almost the entire ride-hailing market in China, plunged 20% in U.S. trading just days after a $4.4 billion IPO.
So far this year, 37 Chinese companies have listed in the U.S., surpassing last year’s count, and raised a combined $12.9 billion, according to data compiled by Bloomberg. One-third of these firms were trading lower on Tuesday.
More uncertainty awaits investors in Chinese companies.
In landmark anti-monopoly regulations released in November after the abrupt suspension of Ant Group Co.’s IPO, the antitrust watchdog wrote in language to give it approval power over mergers and acquisitions conducted by VIEs. The condition has since been used to fine tech companies for past deals and hangs over future transactions.
On Wednesday, 500,000 yuan ($77,365) fines were imposed on numerous deals involving Alibaba, Tencent and other companies that were found to have breached anti-trust rules.
One company poised to test sentiment soon is Hong Kong on-demand logistics and delivery firm Lalamove, known as Huolala in China. It filed confidentially for a U.S. initial public offering, according to people with knowledge of the matter, and is seeking to raise at least $1 billion.
Tencent-backed social app Soulgate Inc. last month abruptly called off its debut after filing a prospectus and determining an initial price range. And podcast app Ximalaya Inc. has filed for but not yet pulled the trigger on a U.S. IPO that could raise at least $500 million.
ByteDance Shelved IPO Intentions After Chinese Regulators Warned About Data Security
Owner of TikTok video app took different approach from ride-hailing company Didi, which pressed ahead with U.S. listing.
ByteDance Ltd., the Chinese owner of popular short-video app TikTok, put on hold indefinitely its intentions to list offshore earlier this year after government officials told the company to focus on addressing data-security risks, people familiar with the matter said.
The Beijing-based social-media giant, last valued at $180 billion in a funding round in December, had been weighing an initial public offering of all or some of its businesses in the U.S. or Hong Kong, according to people familiar with the company’s plans.
But the company’s founder, Zhang Yiming, decided it would be wiser to put the plans on ice in late March, after meetings with cyberspace and securities regulators in which they asked the company to focus on addressing data-security risks and other issues, the people familiar with the matter said.
The company had other reasons for delaying the listing. It didn’t have a chief financial officer at the time, a person close to the company said.
ByteDance’s cautious approach contrasts with that of Chinese ride-hailing giant Didi Global Inc., which runs the country’s ubiquitous car-hailing app. Didi pressed ahead with listing plans in the U.S. despite suggestions from the cyberspace administration not to amid concerns that some of its data could fall into foreign hands, The Wall Street Journal reported.
Didi raised $4.4 billion in late June but is now the subject of a cybersecurity investigation and has since had its main app and 25 others it operates ordered removed from Chinese app stores.
The Cyberspace Administration of China, the nation’s internet regulator, and the China Securities Regulatory Commission didn’t respond to requests for comment.
Chinese authorities have been stiffening enforcement over the country’s technology companies since November, with a sweeping antimonopoly crackdown, and new rules to govern data collection and cybersecurity practices. Several other companies, including Alibaba Group Holding Ltd. and online delivery company Meituan, have been caught up in the dragnet.
One concern in Beijing has been that data collected by China’s tech companies could be compromised as a result of greater disclosure associated with a U.S. listing. The authorities have also been cracking down on improper collection and use of data to protect consumers’ interests.
On Tuesday, China said it would tighten oversight of offshore listings. The securities regulator is drafting rules that could require offshore registered companies to seek regulatory approval before selling shares in foreign markets, with the cyberspace administration leading interagency scrutiny into IPO candidates to make sure their plans don’t risk national security.
On Saturday, the agency proposed amending its own draft cybersecurity-review rules to include a requirement that internet companies with more than one million users undergo a cybersecurity review if they are looking to list abroad.
Previously, Chinese companies didn’t typically need the cyberspace administration’s permission to list overseas. But toward the end of 2020, as U.S.-China tensions deepened, the administration began requiring some technology companies to inform it about possible overseas listings and seek informal approval, people familiar with the agency said.
In ByteDance’s case, Chinese regulators never called outright for a delay in possible share offerings, people familiar with the matter said.
But regulators were concerned about the data-security compliance of ByteDance’s apps in China, the person close to the company said. During the meetings, the regulators were eager to understand how ByteDance collected, stored and managed data, according to people familiar with communication between the two parties.
ByteDance runs apps used by hundreds of millions of people in China, including short-video app Douyin and Jinri Toutiao, or Today’s Headlines. Personal information collected by Douyin can include mobile-phone numbers, birthdays, real names and ID numbers.
Given Beijing’s concerns, ByteDance’s Mr. Zhang assessed that the time wasn’t right for an IPO because of the political and regulatory environment, the people familiar with the matter said.
On April 23, Bytedance said in a statement on its social media account, “After serious research, we think the company does not fulfill the necessary requirements to go public, and currently have no such plan.” The company didn’t provide further explanation for its decision at the time.
Bytedance, whose shareholders include Sequoia Capital and KKR & Co., is one of the world’s most valuable startups. Unlike Didi, which had chalked up losses for years, Bytedance’s financials meant it didn’t have to hurry to list, said people familiar with the company.
The company told employees in June that its revenue last year more than doubled to $34.3 billion as advertising on its platforms grew, while gross profit rose to $19 billion.
ByteDance has had previous run-ins with regulators. In early 2018, Beijing shut down a joke app, Neihan Duanzi, run by the company on the grounds that it contained vulgar content. Mr. Zhang responded with a lengthy social-media post apologizing and promising to add more censors.
This year, ByteDance was publicly called out by authorities for a variety of infractions including excessive collection of users’ personal information and unsuitable content.
Bytedance was among 13 internet companies summoned by financial regulators and told to adhere to much tighter regulation of their data and lending practices in April. It was also among nearly three dozen Chinese tech companies that made public pledges to comply with antimonopoly laws that month.
In May, the company’s 38-year-old founder, Mr. Zhang, resigned as chief executive, joining a group of tech leaders who have stepped down as the government increases pressure on the sector.
ByteDance has also faced pressure from U.S. regulators. Last year, the Trump administration raised concerns that data its TikTok app collects from users could be shared with the Chinese government. TikTok denied that could happen.
The Biden administration revoked in June a Trump-era attempt to ban TikTok in the U.S. But TikTok still faces a broad review of apps controlled by foreign adversaries to determine whether they pose a security threat to the U.S.
Chinese Tech Stocks Jump After Tencent Gets Deal Approval
Hong Kong-listed Chinese tech stocks rose the most in nearly three weeks on Tuesday as official approval for a Tencent Holdings Ltd. acquisition eased investor concerns about Beijing’s recent regulatory crackdown.
Tencent’s purchase of search engine developer Sogou was approved by China’s anti-monopoly regulator, according to a statement on the website of the State Administration for Market Regulation. The Hang Seng Tech Index jumped 1.9% — its biggest gain since June 25 — while Tencent climbed 3.9%
The gauge of the city’s tech stocks had fallen as much as 10% this month after China vowed to increase scrutiny over data collection and overseas listings.
“Regulators are still considering each deal case by case and not rejecting all of them. The sentiment is not that negative now,” said Castor Pang, head of research at Core Pacific Yamaichi. “Any good news will trigger buying on dips in the sector.”
Elsewhere, internet giant Meituan rose 3.4% after Caijing reported Monday that the company re-launched a ride-hailing app after industry leader Didi Chuxing was barred from offering new downloads. Short-video streaming platform Kuaishou Technology jumped 5.7% and Alibaba Group Holding Ltd. gained 4%.
China Orders Tencent To Give Up Exclusive Music Rights
Tencent Holdings Ltd. was ordered to give up exclusive music streaming rights and pay half a million yuan in fines, becoming the latest Chinese internet giant to be brought to heel by regulators.
An official investigation found Tencent’s 2016 acquisition of China Music Corp.’s stakes violated regulations partly because of a lack of reporting to authorities, according to a statement by the anti-trust watchdog on Saturday. The State Administration for Market Regulation required Tencent and its affiliates to waive exclusive music rights within 30 days and handed down a fine of 500,000 yuan ($77,145).
That deal had help create Tencent Music Entertainment Group, which was formed after the merger of QQ Music and China Music Corp.
The government agency also asked Pony Ma’s social media and gaming giant and its affiliates to stop demanding music copyright holders to give it better treatment than its competitors through practices such as providing high advance payments. The companies must submit their plans for rectification within 10 days to the watchdog and continue to report on their enforcement of the changes annually in the next three years.
Tencent will make rectification plans with its affiliates including Tencent Music Entertainment within the time limit designated and “faithfully” carry out the SAMR’s order to ensure all requirements are met, the company said in a statement on its official WeChat account.
The penalty levied on Tencent marks the most-direct hit to Asia’s most valuable corporation from Beijing’s escalating campaign against its tech giants. Fellow internet behemoth Alibaba Group Holding Ltd. was fined a record $2.8 billion in April for antitrust violations, while its affiliate Ant Group Co. had to scrap an initial public offering and restructure into a financial holding company.
Firms backed by Tencent have also come under scrutiny: food-delivery leader Meituan is facing an anti-monopoly probe while Didi Global Inc., operator of the country’s largest ride-hailing service, was this month ordered off Chinese app stores by cyberspace regulators.
Beijing has sought to curtail the growing influence of China’s powerful internet corporations over every aspect of Chinese life from online shopping to chatting and ride-hailing. That campaign is now extending into the arena of data security, with President Xi Jinping’s government said to be exploring a number of models and actions to open up their information hoards.
Separately, financial regulators are planning rule changes that would allow them to block a Chinese company from listing overseas even if the unit selling shares is incorporated outside China, people familiar with matter have said.
In response, the tech giants have pledged to comply with regulations and refrain from anti-competitive behavior, while ramping up spending significantly to spur growth. Tencent said in May it will plow a larger portion of its incremental profits this year into cloud services, games and video content, joining Alibaba and Meituan in telegraphing sharp hikes in investment.
The Shenzhen-based firm has also unveiled plans to invest 50 billion yuan in its so-called social values initiative to fund philanthropic efforts in areas such as education, rural revitalization and carbon neutral that align firmly with Xi’s priorities.
China’s antitrust authorities had previously investigated Tencent’s dealings with the world’s three biggest record labels but the probe was suspended, people familiar with the matter said last February. Tencent Music has noticed a tightening in antitrust scrutiny and has been cooperating with regulators, executives said in May.
Tencent Music has long held a commanding lead in Chinese music through exclusive rights to a major chunk of Universal Music Group, Sony Music Entertainment and Warner Music Group Corp.’s catalogs, which it then sublicenses to smaller platforms including those operated by NetEase Inc., Alibaba and Xiaomi Corp. That dominance was weakened when NetEase struck deals to directly license songs from Universal and Sony.
Over the past seven months, the watchdog has already imposed token fines — amounting to at least 4.5 million yuan, excluding penalties for affiliates — on the company for not seeking approval for a number of past investments and acquisitions.
China’s Internet Rulers
Tencent, Alibaba and Ant Group have invested in a vast array of Chinese startups spanning realms from social media to online commerce.
The firm, co-founded by China’s second-richest person more than two decades ago, has previously been accused by rivals including TikTok owner ByteDance Ltd. of alleged monopolies by blocking their content on its WeChat super app, the chatting and payments service used by more than a billion people. In February, ByteDance filed a lawsuit accusing the larger company of violating antitrust laws by blocking content from Douyin, the Chinese twin of its globally popular short app, on WeChat and QQ.
Tencent’s fast-growing fintech businesses are also under separate scrutiny. China’s top financial regulators see Tencent as deserving increased supervision after the clampdown on Ant, people with knowledge of their thinking told Bloomberg in March. The firm was among 13 companies ordered by watchdogs including the central bank and the banking regulator at the end of April to rein in their financial operations, imposing upon them many of the restrictions that have already been levied on Ant.
Executives have sought to assuage investor concerns, saying that Tencent remains very focused on risk management and has been “self-restrained” on the size of its non-payment financial products.
“When we look into the internal review, and when we look into what other things that need to be done in order to make sure that we are compliant with the spirit of the regulators, it’s actually relatively manageable,” President Martin Lau said during the corporation’s first-quarter earnings conference call.
China Bans For-Profit School Tutoring In Sweeping Overhaul
China unveiled a sweeping overhaul of its $100 billion education tech sector, banning companies that teach the school curriculum from making profits, raising capital or going public.
Beijing on Saturday published a plethora of regulations that together threaten to up-end the sector and jeopardize billions of dollars in foreign investment.
Companies that teach school subjects can no longer accept overseas investment, which could include capital from the offshore registered entities of Chinese firms, according to a notice released by the State Council.
Those now in violation of that rule must take steps to rectify the situation, the country’s most powerful administrative authority said, without elaborating.
In addition, listed firms will no longer be allowed to raise capital via stock markets to invest in businesses that teach classroom subjects. Outright acquisitions are forbidden. And all vacation and weekend tutoring related to the school syllabus is now off-limits.
The regulations threaten to obliterate the outsized growth that made stock market darlings of TAL Education Group, New Oriental Education & Technology Group and Gaotu Techedu Inc. They could also put the market largely out of reach of global investors.
Education technology had emerged as one of the hottest investment plays in China in recent years, attracting billions from the likes of Tiger Global Management, Temasek Holdings Pte and SoftBank Group Corp.
What Bloomberg Intelligence Says
“Operating losses at New Oriental and TAL can only worsen over the next several years as China overhauls its tutorial industry.
Cost cuts won’t keep pace with revenue declines in the short term as the government, with the stated goal of lightening students’ workload, banned for-profit school tutoring as well as holiday and weekend lessons.”
— Catherine Lim, Bloomberg Intelligence
China Orders 25 Tech Giants To Fix Raft of Problems
China ordered more than two dozen technology firms to carry out internal inspections as part of a campaign to root out illegal online activity.
The Ministry of Industry Information Technology on Friday told 25 of its largest internet and hardware companies including Alibaba Group Holding Ltd. and Tencent Holdings Ltd. to carry out internal reviews and rectify issues ranging from data security to consumer rights protections. The twin giants and 10 other firms were also asked separately on Wednesday to step up data security protections, including the export of key information, by the Internet Society of China, which was acting on behalf of MIIT.
The meetings this week come after the internet industry regulator announced on Monday it was beginning a six-month campaign to crackdown on illegal online activity. Days later, it told Tencent and 13 other corporations to address problems related to pop-ups within their ads. The crackdown is the latest move by Beijing to rein in the country’s internet leaders in areas from antitrust to data security and ride-hailing.
Meituan, Xiaomi Corp. and ByteDance Ltd. were among firms summoned to both meetings. On Friday, the MIIT ordered the companies to address eight types of problematic behavior including pop-ups, data collection and storage as well as the blocking of external links.
At the earlier session, the firms were asked to ensure that they establish data security management systems and appoint personnel responsible for data security, as well as strengthen oversight of how important information is exported, according to a statement Friday. The companies didn’t immediately respond to requests for comment.
Xi Jinping’s government has made data security one of its top priorities in its campaign against the internet industry. The cyberspace regulator had cited data security risks as a key reason for its investigation into Didi Global Inc. and has proposed a law requiring virtually all companies seeking to go public outside China to seek approval.
Big data is quickly turning into the next major battleground in a clash of superpowers, with implications that potentially could reshape the global economy for decades to come. With the U.S. lobbying other nations to prevent China from obtaining technology like advanced computer chips and Xi undertaking a national project to develop them, stringent data security controls risk further disrupting supply chains, balkanizing financial markets and forcing countries to pick sides.
China’s Antitrust Regulator Planning To Fine Meituan About $1 Billion
The penalty for allegedly abusing its dominant market position could be announced within weeks, people familiar with the matter say.
China’s antitrust regulator is preparing to impose a roughly $1 billion fine on food-delivery giant Meituan for allegedly abusing its dominant market position to the detriment of merchants and rivals, according to people familiar with the matter.
The penalty could be announced in the coming weeks, and Meituan would be required to revamp its operations and end a practice that has been dubbed “er xuan yi”—literally, “choose one out of two,” the people said. Such exclusivity arrangements have forced many small businesses to pick sides in China’s competitive retail industry.
Meituan, with a market capitalization of about $170 billion, has raised billions of dollars from global investors and is China’s third-most valuable publicly listed internet company after Tencent Holdings Ltd. and Alibaba Group Holding Ltd. The Beijing-headquartered firm operates an online marketplace for millions of restaurants and other merchants, and is the biggest provider of food-delivery and related services in China. It also offers hotel bookings and sells groceries online.
China’s State Administration for Market Regulation, the country’s top commerce regulator that is overseeing Beijing’s antitrust push, in April imposed a record $2.8 billion fine on Alibaba for “er xuan yi” practices, in which the e-commerce giant punished merchants that sold goods on its platform and on rival marketplaces. That fine was equivalent to 4% of Alibaba’s domestic annual sales.
The antitrust watchdog believes Meituan has also prevented businesses from selling their goods on rivals’ platforms, the people familiar with the matter said. Its probe into Meituan’s suspected monopolistic behavior began in April. The company said it would fully cooperate with the investigation and has pledged to comply with China’s antimonopoly laws. Meituan reported the equivalent of $17.8 billion in revenue in 2020.
Meituan and the SAMR didn’t immediately respond to requests for comment Friday. Under Chinese rules, antitrust fines are capped at 10% of a company’s annual sales.
Regulators in China have gone after numerous companies in the private sector, calling out what they describe as unfair business practices and ordering dozens of companies to rectify problems and make amends. The widening regulatory clampdown—which shows no signs of abating—has forced global investors to reassess the future and growth prospects of many firms. The country’s six top technology companies have together lost more than $1 trillion in market value since a peak in February.
Meituan is also a big player in China’s gig economy, which has millions of workers that aren’t formally employed by companies and are often paid by the hour. Chinese regulators recently criticized the industry for its poor treatment of delivery workers and other independent contractors. Meituan has promised to purchase insurance for all its delivery riders that would provide better injury coverage.
The company has also started making changes to the way it pays merchants and restaurants that sell on its platform, by lowering fees and prohibiting exclusivity arrangements.
Meituan was founded in 2010 by Wang Xing, an entrepreneur and billionaire who is currently CEO. He was recently embroiled in controversy after posting an ancient Chinese poem that referenced book burning by a Qin dynasty emperor on social media. The post was interpreted by some internet users as a veiled criticism of China’s government. Mr. Wang subsequently deleted the post and said it was instead supposed to refer to Meituan’s rivals.
About a month later, Mr. Wang donated Meituan shares worth more than $2 billion to his own philanthropic foundation. The company said most of the funds would go toward education and scientific research. Both areas are among Chinese President Xi Jinping’s social and economic development priorities.
During the Chinese Communist Party’s 100th anniversary celebration last month, a state broadcaster showed Mr. Wang listening to Mr. Xi’s speech at Beijing’s Tiananmen Square. His public appearance was viewed by some China watchers as a sign that he was back in the government’s favor.
Shares of Meituan, which listed in Hong Kong in 2018, hit a high in February this year, giving the company a market capitalization of more than $340 billion. Many analysts and investors have since cut their forecasts of Meituan’s revenue and profit growth, as they expect the company to have to pay workers more and remedy other issues that regulators have identified.
China Education Firms To End Most Classes With Foreign Teachers
China’s largest private education firms said they will stop providing classes taught by foreign-based tutors to students in the country, in response to a recent government directive aimed at rectifying the $100 billion sector.
Tencent Holdings Ltd.-backed VIPKid said it will cease selling new such classes effective immediately, and existing customers can renew lessons only until Aug. 9, according to a notice on its Wechat account Saturday. Students will be able to finish taking classes from foreign teachers that they have already paid for.
China’s government enacted its harshest ever curbs on the after-school tutoring industry last month, banning companies from hiring foreigners outside the country as teachers or introduce school curricula to children under six. The regulations marked the culmination of a months-long campaign to rein in ad spending wars and cut-throat competition that’s come to define a sector critical to China’s future workforce.
While Beijing’s new rules banned foreign teachers, it originally wasn’t clear whether tutoring companies would be able to keep using those teachers if they were contractors, rather than employees. A company like VIPKid could argue it was simply a platform for matching students with teachers. The latest developments suggest such arguments haven’t worked with Beijing’s regulators.
Classes sold to overseas Chinese students won’t be impacted, VIPKid said.
“While the new regulations will impact our business in China, we remain confident in VIPKid’s future,” said Adam J. Steinberg, a company spokesman. “Over the past year, we have been piloting several education programs outside of China. We will now accelerate our efforts on these and other programs as we continue to execute on our mission to inspire and empower every child for the future.”
On Friday, VIPKid sales called up users to encourage them to pay for new classes, hinting they won’t be able to do so after this weekend due to the new regulations.
Another similar one-on-one English tutoring app, ByteDance Ltd.’s GoGoKid, said it suspended all classes offered to Chinese students from Aug. 5.
51Talk, which previously thought it wasn’t affected by the new regulations, is also planning to target overseas and adult markets, said a person familiar with the matter. The company has yet to issue an official notice.
China Can’t Lead on Crypto With Isolationism
Don’t think of Beijing’s policies toward virtual currencies as a global pacesetter. They’re part of the broader turn inward.
Yet again, China has gotten an edge over the U.S. — this time in virtual currencies. The central bank’s snazzy digital yuan could be a threat to dollar primacy, and, if the Federal Reserve fails to match it, the U.S. will fall dangerously behind in an entirely new area of superpower competition.
Or so some contend. In fact, the opposite is true. Beijing’s policy toward virtual currencies — especially the crypto kind — is making it an outlier, not a leader, and cutting the economy off from a major new trend in international finance. Without a shift in approach, China could well be the one that gets left behind.
The same can be said with many aspects of current economic policy. Beijing’s distrust of cryptos is indicative of the government’s greater and growing wariness of private enterprise more broadly — as investors learned all too painfully in a recent crackdown on big tech and other sectors that tanked Chinese stocks around the world. What’s going on isn’t “state capitalism” as usual, with bureaucrats intruding on the market, but a fundamental revision of the relationship between the state and private sector, with long-term consequences for China’s position in the global economy.
China’s crushing of cryptos is another piece of that story. Authorities banned banks and finance firms from providing Bitcoin and other cryptocurrency services and shut down most mining operations, tipping off a mass exodus of equipment from the country. While some other governments have acted to curtail cryptos, including Turkey’s, no major economy has gone so far as China’s. The Indian central bank tried to prohibit financial institutions from the virtual currency business, but the attempt got shot down by the country’s top court last year.
Perhaps China is simply being cautious with new and uncertain financial instruments, and prefers to expend energy manufacturing cars, not Bitcoins. Personally, I’m not sold on cryptocurrencies, either. I have yet to hear a convincing argument for why Bitcoin should be valued at $60,000 or $60.
Still, by taking such stern action, Beijing is isolating the economy from an emerging financial sector and the potential innovation, entrepreneurship, and wealth it can create. It means there won’t be local competitors to firms like Coinbase Global Inc., now worth over $50 billion, nor will Chinese investors and consumers be able to participate in the profits and some of the services generated by the crypto craze.
Instead, they’ll be left with the digital yuan, which is essentially the opposite of a cryptocurrency. Rather than being decentralized and independent, it’s firmly under the thumb of the People’s Bank of China and can be utilized to exert even more state control over the economy by making it easier to track transactions and spending. By contrast, the Fed might move in a very different direction. Vice Chair Randal Quarles recently downplayed the need for a formal digital dollar and instead favored private-sector innovation in virtual currencies, such as stablecoins.
Perhaps some new firms and ideas will pop up around the digital yuan once it becomes more widely used, but those creations will likely remain primarily local. The yuan’s digital version will probably face the same hurdles as the old-fashioned one to gaining an international audience — mainly, the lack of access to yuan assets caused by capital controls. A July report from research firm Capital Economics concluded that the so-called e-CNY “will do nothing to relax the constraints that have prevented the renminbi being widely adopted in international trade or as a reserve currency.”
This adds up to a China trapped in its own digital currency universe. While the rest of the world is trading Bitcoin and Ethereum, the Chinese will be left on the sidelines, passing the digital yuan largely among themselves, or at least in transactions the state can control. It’s just one signal that policy makers have little intention of lifting the controls and prohibitions that shield the financial sector from global capital markets.
Beijing’s heightened scrutiny of overseas initial public offerings in the wake of ride-sharing service Didi Global Inc.’s New York listing will likely block many local firms from foreign exchanges — yet another insular step for Chinese finance.
More importantly, China’s crypto crackdown is part of a larger, worrisome trend toward isolation. Sure, the economy remains highly integrated with the rest of the world. International companies continue to invest eagerly in the China market (though the bloodletting of recent weeks may scare off some foreign capital). But in many respects, cyptocurrencies are more representative of its true direction — one that limits, and even reverses, intermingling with the global economy.
The domestic market is big enough for local firms to flourish, including in the digital currency space. But if China is ever to displace the U.S. as the world’s indispensable economy, Beijing will have to embrace, not shun, emerging global trends. The country can’t be a leader if Chinese are forced to invest, shop and use technology differently from nearly everyone else. In the end, if Beijing can’t adapt to change in the global economy, it certainly won’t shape it.
Jack Ma’s Costliest Business Lesson: China Has Only One Leader
The billionaire entrepreneur matched the heights of America’s tech legends but failed to heed warnings that Chinese leader Xi Jinping still called the shots.
Brainy and ambitious, Jack Ma built one of China’s largest business empires from scratch, creating billions of dollars in wealth and introducing digital innovations to hundreds of millions of people. He wasn’t China’s Jeff Bezos, Elon Musk or Bill Gates. He was their peer.
Now he has disappeared almost entirely from public view, in part because of the same go-for-broke drive he shared with the other 21st century tech titans.
Technological disruption, once seen as a useful prod for China to catch up with the West, has been recast as a threat to the ruling Communist Party. As a result, Xi Jinping, China’s most powerful leader in decades, is rewriting the rules of business for the world’s second-largest economy.
Mr. Ma failed to keep pace with Beijing’s shifting views and lost an appreciation for the risks of falling out of step, according to people who know him. He tuned out warnings for years, they said. He behaved too much like an American entrepreneur.
Mr. Ma’s exit from the world stage followed a typically frank speech in October, when he criticized Chinese regulators for stifling financial innovation. Mr. Xi personally intervened days later to block the record $34 billion-plus initial public offering of Ant Group, Mr. Ma’s financial-tech company. Since then, Ant has been forced to restructure its business, leaving the company’s employees and investors in limbo.
Beijing has cracked down on China’s private sector, issuing fines and initiating probes meant to force Mr. Ma’s companies, as well as such firms as ride-hailing giant Didi Global Inc. and TikTok owner ByteDance Ltd., to adhere more closely to the state’s interests. The companies, holding troves of capital and user data, had grown too expansive for the government to control.
Mr. Ma, 56 years old, has exchanged a wall-to-wall schedule of business travel and meetings with world leaders for golf and the reading of Taoist texts, people familiar with his activities said. He hired a teacher to learn oil painting, starting out with images of birds and flowers and then shifting to an abstract style, according to these people and photos of his artwork viewed by The Wall Street Journal.
He also has traveled to Beijing to try to smooth things over, the people familiar with his activities said. It was too little, too late, officials said. Mr. Ma strayed too far out of his lane. His ambition and outspoken nature, traits that drew a strong following among many in China, would no longer be tolerated in the tightened grip of Mr. Xi and the ruling party.
Chinese government agencies involved in regulating Mr. Ma’s companies, including the People’s Bank of China, the China Banking and Insurance Regulatory Commission and the State Administration for Market Regulation, didn’t respond to requests for comment. The information office of the State Council, China’s cabinet, didn’t respond to written questions.
Mr. Ma should have focused on “giving back to the Party instead of just focusing on his own interests,” said a Beijing official in the regulatory push. That meant keeping a lower profile, doing more to support government enterprises and sharing more company profits with society.
His defenders said Mr. Ma was being punished for acting in ways that reward tech moguls in Western economies—pushing innovation, seeking market domination, creating new products, lobbying for looser regulation and making money. They credit his dynamism, charisma and work ethic for the success of Ant and his e-commerce giant, Alibaba Group Holding Ltd.
Mr. Ma “wants to be a constructive voice in the public discourse of complex issues such as regulation over digital finance,” said Fred Hu, a former chairman of Goldman Sachs in Greater China and founder of Primavera Capital Group, a private-equity firm that has invested in Ant.
“I would characterize Jack’s relationship with the regulators as generally positive and healthy,” said Mr. Hu, an independent director on Ant’s board.
Mr. Ma’s spokesperson said details about Mr. Ma’s activities reported by the Journal weren’t “based on facts but rather on unsubstantiated opinions and/or third-hand observations,” and didn’t comment further.
This account of Mr. Ma’s souring relationship with China’s leadership is based on interviews with government officials and policy advisers in Beijing, current and former business associates of Mr. Ma’s, and investors and employees in his companies.
Follow His Heart
When Mr. Ma started out in the 1990s, he was captivated by the internet’s potential to lift Chinese society at a time when the nation was entering a new global economy. He sometimes showed up unannounced at government offices seeking meetings to explain his vision.
After Mr. Ma launched Alibaba as a business-to-business platform in 1999, many senior officials embraced his enthusiasm. Former Chinese premier Wen Jiabao called himself a “serious student” of Mr. Ma’s.
Alibaba boomed in the late 2000s, and Mr. Ma appeared on posters and TV screens hung in convenience stores and at airport and railway waiting areas across China. Millions watched him issue his prescriptions for success. “The success or failure of a company often depends on if the founder could follow his heart,” he said in one early speech.
Government officials hailed his work. One was Mr. Xi, who by the early 2000s had become the top leader of Zhejiang province, where Alibaba is based. Mr. Xi promoted startups, in line with Chinese policy at the time.
“He encouraged companies like Alibaba to expand because they’re good for the country,” a former Zhejiang official recalled. After Mr. Xi left Zhejiang in 2007 to be Shanghai’s top official, he visited Alibaba and asked, “Can you come to Shanghai and help us develop?” state media reported.
Early on, Mr. Ma sometimes felt it wiser to keep elements of his business plans under wraps, especially ideas that pushed regulatory boundaries.
Porter Erisman, an Alibaba vice president from 2000 to 2008, said that during a meeting at company headquarters in 2003, government officials signaled concerns over Mr. Ma’s newest venture, a platform called Taobao that let people sell goods directly to each other online.
“There was this kind of shock that, ‘Wait, what is this? He’s talking about just people, unregulated, selling things to each other?’ ” recalled Mr. Erisman, author of “Alibaba’s World.”
Sensing the discomfort of officials, Mr. Ma quickly changed the subject and ushered his guests to a company tour, Mr. Erisman said.
Backed by success, Mr. Ma grew more bold and had few people to hold him back. He touted Alipay, the online payment service he created for transactions on Alibaba’s e-commerce platforms, even though it threatened the dominance of China’s state-owned banks.
Chinese banks weren’t doing enough to support small businesses, Mr. Ma said, because they focused too much on state-owned enterprises. “If the banks don’t change, we’ll change the banks,” Mr. Ma said at a 2008 conference.
After Mr. Xi became president in 2013, the freewheeling atmosphere in the private sector that had prevailed under China’s previous leaders, Jiang Zemin and Hu Jintao, began to thin. Mr. Xi announced that “state-owned enterprises cannot be weakened, but must be strengthened.”
The shift in Beijing coincided with Mr. Ma’s global ascent—and he didn’t appear to notice the change. In 2014, Alibaba raised $25 billion in its initial stock sale on the New York Stock Exchange, one of the biggest stock sales on record, surpassing Facebook’s offering. ”What we get today is not money,” Mr. Ma said in a speech that day. “What we get is trust. It is everyone’s trust in us.”
Mr. Ma proclaimed it felt good to create discomfort for China’s state-owned enterprises. “If someone needs to go to jail for Alipay, let it be me,” he said during a 2015 TV interview in the U.S.
Chinese officials grew concerned about the expanding market power of Alibaba and Ant, which grew out of Alipay, a payment app used by more than a billion consumers. Regulators believed Ant used data gathered from Alipay users to gain an unfair advantage over banks and made it difficult for the state to monitor credit risk.
In 2015, China’s market regulator issued a report saying many products sold on Alibaba’s Taobao were fake, substandard or banned. Some infringed on trademarks, the report said.
Alibaba threatened to file a formal complaint. Mr. Ma flew to Beijing and met with the then-head of the State Administration for Industry and Commerce, the agency that issued the report. Later that day, the regulator removed the report from its website and described it as an internal memo, not an official document. “We feel vindicated,” Alibaba said in response.
It wasn’t clear what caused the about-face. “I’ve repeatedly emphasized to Jack Ma that, ‘You are not outside the law,’ ” Zhang Mao, then-head of the industry and commerce agency, said in a 2016 TV interview.
Yet the retreat gave the impression to many in China that Alibaba was strong enough to challenge the government.
Chinese officials also took a close look at Yu’e Bao, an investment product created by Ant in 2013. It enabled the hundreds of millions of people who used Alipay to transfer cash into accounts that earned returns exceeding those offered by China’s state-owned banks.
Yu’e Bao’s main fund became the world’s largest money-market fund in 2018, with the equivalent of $244 billion in assets under management.
Regulators ordered Ant to shrink the fund over concerns it was taking on too much risk.
By then, the divide between Mr. Xi and Mr. Ma had broken into the open.
A September 2015 meeting in Seattle brought together Mr. Xi and high-profile U.S. and Chinese executives, including Mr. Ma and IBM’s then-chief executive Ginni Rometty. Each person was given three minutes to speak in front of the Chinese leader, who was in the U.S. for a state visit.
All stuck to their allotted time except Mr. Ma. He talked for 10 minutes about how China views the world and what Chinese companies could do to improve U.S.-China relations, according to people present.
Mr. Xi was “certainly not happy,” said a person familiar with Mr. Xi’s views. It was the last time Mr. Ma was invited to speak in front of China’s leader in a group setting. A spokesperson for Mr. Ma said there was no truth to the account but didn’t elaborate.
Mr. Ma was invited by President Barack Obama to a private White House lunch in Washington. He talked about e-commerce with then-French President François Hollande at the Élysée Palace in Paris.
Early in 2017, Mr. Ma met with then-U.S. President-elect Donald Trump. With cameras rolling, the two men walked into the Trump Tower lobby in Manhattan, where Mr. Trump praised his guest as “a great, great entrepreneur.”
For Alibaba’s 18th birthday that year, Mr. Ma dressed as Michael Jackson and danced to the song, “Billie Jean,” in front of roughly 40,000 employees, a performance viewed by millions on YouTube.
While Mr. Ma’s profile abroad flourished, his stock at home sank. His personal office at times sent suggestions to China’s leadership through an office in the Communist Party’s Central Committee that reported to Mr. Xi. Mr. Ma only occasionally got a reply.
It was “like writing love letters to a loved one, but not getting many responses,” said a person familiar with the correspondence.
Mr. Ma’s spokesperson said Mr. Ma’s personal office doesn’t submit regular reports to the committee.
The People’s Bank of China in 2017 demanded that banks cut direct links to Alipay and other nonbank payment firms and instead route online payments through a central bank-designed platform.
The central bank in internal documents criticized Ant for interfering with money in circulation by promoting a “cashless society.” There also were concerns at the central bank that Ant could become too big to rescue in a financial meltdown, according to people familiar with the matter.
When Beijing cracked down on other entrepreneurs, Mr. Ma flaunted his skill at managing political risk. “We always stay a step ahead of the regulators—we have to,” Mr. Ma said in a 2017 interview.
The next year, Mr. Xi summoned some 50 entrepreneurs to China’s Great Hall of the People. Mr. Ma wasn’t invited.
Regulators raised concerns about other Ant products, including Huabei, a virtual credit card-like service that helped fuel consumer spending. It became popular among young Chinese buyers after its 2015 launch.
Ant initially used mostly asset-backed securities to fund Huabei loans, rather than using deposits as banks do. In late 2017, the central bank limited the ability of Ant and other lenders to issue such debt instruments to fund loans, wary of too much leverage in the financial system.
Ant tried teaming up with banks to supply funding. It handed off most of the risk but didn’t fully share the methodology it used to evaluate borrowers’ creditworthiness. That created new headaches for regulators.
By June 2020, Huabei’s credit outstanding accounted for nearly a fifth of China’s short-term household debt.
During a visit last summer to Hefei, a Chinese city northeast of the epicenter of the Covid-19 outbreak, Mr. Ma invited medical workers for a hot pot banquet to show his appreciation. A local media report referred to him as “Teacher Ma” and said he sang opera for the guests.
Senior leaders were annoyed, according to a person familiar with the matter. Beijing took credit for China’s Covid-19 response, and some officials thought it wasn’t Mr. Ma’s place to thank front-line workers.
When Ant filed its IPO prospectus in August last year, it disclosed detailed financial data for the first time. Some regulators were caught off guard to see how big Ant’s lending business had become. Officials reiterated the need to manage potential financial risks. They also sought to prevent billionaires and other power figures who invested in Ant from getting even richer, according to people involved in the regulatory effort.
Some Chinese investors grumbled that Ant acted arrogantly during its IPO roadshow, requiring people to make presentations if they wanted to invest and limiting attendance for meetings with company management.
Even though Ant was supposed to be in a silent period before the IPO, Mr. Ma live-streamed a singalong last September with Faye Wong, a Chinese pop superstar.
The company was lambasted by social media users when it announced in October that Ant would trade on the Shanghai Stock Exchange under the ticker 688688, an especially auspicious set of numbers in Chinese culture. That Ant landed such a highly coveted set of numbers was seen as a sign of its power.
The night before Mr. Ma’s October speech that criticized regulators, he alerted employees that he planned to lay into authorities.
Within hours of the speech, state regulators began compiling reports on Mr. Ma’s companies, including how Ant had used digital financial products to encourage excessive borrowing and spending, threatening China’s economy.
Mr. Xi scrapped Ant’s IPO. Mr. Ma’s ride to the top ended.
Weeks later, senior Alibaba executives took blame. Mr. Ma told them they were wrong. The failure of the IPO, set to be his crowning achievement, was his fault, he said.
Xi Doubles Mentions of ‘Common Prosperity,’ Warning China’s Rich
President Xi Jinping’s rhetoric about “common prosperity” surged this year, evidence of the Communist Party’s commitment to closing the country’s yawning wealth gap.
The term appeared sporadically in his first eight years in power. Last year, he began to reference “common prosperity” more often and has picked up the pace: The phrase has appeared 65 times in Xi’s speeches and meetings so far this year, compared with 30 in all of last year.
The sloganeering signals the strength of Xi’s intent, said Maria Repnikova, who studies China’s political communication at Georgia State University.
“Slogans often capture new policy directions or shifts and can signal how the policy is changing,” she said. “They’re also often broad, leaving some space for ambiguity and adjustment in interpretation.”
The government put a finer point on it last week. The party’s top economic and financial affairs committee vowed at a meeting Tuesday to “reasonably adjust high incomes,” encourage philanthropy and pursue other strategies to bring the country’s income distribution into the more ideal olive-shaped structure, small on both ends and fat in the middle.
During the Tuesday meeting top policy makers pledged to use “taxation, social security and transfer payment” policies and to tackle illegal and “unreasonable” income. They also suggested that Xi’s target may for the first time expand to include the merely wealthy in addition to the ultrarich.
Xi had previously focused on “excessively high income,” according to a Bloomberg analysis of his speeches.
There’s no official definition of the two groups, but the overall egalitarian push seems to implicate a wider swath of top earners.
The idea of “common prosperity” was originally introduced into party documents by Mao Zedong to reflect the pursuit of a more egalitarian society.
It fell out of frequent use under Deng Xiaoping, who shifted the focus to developing an economy that would allow “some people to get rich first.”
Common prosperity, he said, would come later.
China’s richest 20% earn more than 10 times the poorest 20%, a gap that hasn’t budged since 2015. The country counts 400 million people — about one-third of its population — in its middle class, defined as those with annual household income between 100,000 yuan ($15,392) and 500,000 yuan. More than 600 million people in China still live on a monthly income of 1,000 yuan.
In a series of front-page commentaries published in recent days, the official Economic Daily newspaper said China needed to “prevent the trap of high welfare” and “avoid overemphasizing material comfort,” suggesting caution against people slacking off as a result of the common-prosperity push. The government needed to implement policies that encourage people to achieve wealth through hard work and innovation, the newspaper said.
The party has acknowledged the “difficulty and complexity” of the task at hand and has asked local governments to “gradually push forward.” Xi pledged last year to make “more substantial progress on common prosperity for all” by 2035 — a pilot program in Zhejiang province is designed to narrow the income gap there by 2025.
Country Now Comes Before Profit For Companies In Xi’s China
China’s biggest companies are starting to make a habit out of giving away their earnings.
In the latest example, Pinduoduo Inc., an e-commerce company known for giving big discounts to customers when they buy produce together, said it will donate all of its first net profit since going public to support the country’s farmers and agricultural areas. The company will keep giving away earnings at least until the donations reach 10 billion yuan ($1.5 billion).
“Improving agriculture has been at the front and center of our business from the very beginning. Agriculture touches the daily lives of everyone and has a relatively low digitization rate,” Chief Executive Officer Chen Lei told analysts on a post-results call. “We want to bring even more farmers on board and work with them to improve their lives and livelihood.”
PDD’s announcement comes after a series of similar contributions from the country’s biggest companies and wealthiest people. Tencent Holdings Ltd., China’s most valuable company, said last week it will double the amount of money it’s allocating for social responsibility programs to about $15 billion. PDD co-founder Colin Huang had earlier pledged to personally bankroll research into sciences.
President Xi Jinping has increasingly emphasized the idea of “common prosperity” as the Communist Party tries to address the country’s wealth gap. Regulators are forcing most private education companies to convert into non-profits, while they’ve pushed other tech players to boost pay for low-skill workers at the expense of earnings. PDD’s decision squarely targets one of Xi’s top priorities: alleviating rural poverty.
In the U.S., companies used to make charitable contributions out of corporate profits, but the practice declined after criticism that CEOs were using shareholder money for their own glory. Investors had no such qualms about PDD’s pledge. Shares soared 22% in U.S. trading after the company unveiled the news and a surprise profit for the quarter.
“The move shows the company’s willingness to take social responsibility and explore new opportunities in a blue ocean, though profit margin may be pressured again by these investments,” analysts at China International Capital Corp. wrote in a research note. “We expect 2H21 non-GAAP profit to break even, reflecting all the profits will be invested in the initiative.”
Xi Jinping Shows China He’s The Ultimate Tiger Mom
Setting boundaries on youth education and entertainment is part of Beijing’s moves to create “common prosperity”. The games sector needs to fall into line.
China’s latest tightening of gaming rules is much ado about nothing. Except, of course, that nothing Beijing does is minor or inconsequential these days because everything the leadership says should be taken both literally and seriously.
Shares of the nation’s leading games providers including Tencent Holdings Ltd., NetEase Inc., Bilibili Inc. and Huya Inc. tumbled after the National Press and Publications Administration decreed that minors would be restricted to playing games from 8 p.m. to 9 p.m. on Fridays, Saturdays, Sundays and public holidays.
That sounds pretty harsh, but needs to be put into context. Underage consumers are a small part of their business. Teenage gamers account for around 10% of revenue across the sector and approximately 15% of mobile gaming app users. For Tencent, the largest company in the industry, players under 16 contributed just 2.6% of games sales in the June quarter, or around $170 million.
This rule tightening will cut maximum game time by about 70%, but only for youths. And time-restricting kids’ gaming isn’t without precedent. Two years ago the government issued a daily cap of 1.5 hours, equivalent to 10.5 hours per week. China’s senior leadership felt that excessive games consumption was having a negative impact on kids’ study and lifestyle.
“Guiding online games companies to prioritize social benefits — effectively curbing minors’ gaming addiction, excessive consumption and other behavior — and protecting the physical and mental health of minors is in the spirit of the important instructions of General Secretary Xi Jinping,” the NPPA wrote in November 2019. In other words, this comes from the top. The latest move is merely an incremental, albeit large, step in a policy that was already in place.
Yet the increased control comes a month after a much harsher crackdown on China’s lucrative after-school education industry, when the government announced these services could no longer be offered for profit. Xi has shown direct interest in this sector, too. Back in March he noted that the industry had a tendency to exploit parental anxiety over ensuring their kids remained competitive.
Importantly, there’s nothing yet to suggest that adult gaming or education will be restricted. The games sector already faced its regulatory winter three years back, when the approval of new titles was halted. After it was over they bounced back with more patriotic games and renewed love for their homeland.
This wave of crackdowns is all about the kids. In restricting the “spiritual opium” of games, and easing the pressure of the nation’s harsh educational environment, Xi is becoming China’s ultimate tiger mom by forcefully prescribing what’s best for today’s youth.
What’s likely to follow will be a greater emphasis on sports and recreation, physical skills, and group activities. Any access to after-school education or online games will be centered around patriotic values and “common prosperity” — the new catchphrase used to describe the anti-capitalist, pro-labor reform driven by Xi. As a recent commentary published in state media noted: “Those who block this people-centered change will be discarded.”
Games and education companies will avoid this fate by keeping the kids safe, listening to Xi, and promoting common prosperity. Luckily for investors, that won’t immediately hurt the bottom line.
DEXs Come To The Rescue After China Bans Crypto
China’s wide-spanning crypto ban puts a hefty dent in token values, but the surge in DEX volumes and BTC’s pop above $55,000 suggest the move was a blessing in disguise.
Over the past few months, there have been some major developments coming out of China that have rocked the cryptocurrency market and the global financial markets. China’s Evergrande debt repayment crisis sent shockwaves throughout global equities markets, as well as the United States Securities and Exchange Commission’s (SEC’s) consistent signaling of upcoming regulation for stablecoins and decentralized finance (DeFi) continued to weigh on sentiment within the market.
While the Evergrande situation somewhat resolved itself, for the time being, the government crackdown on unregulated DeFi platforms and stablecoin transactions continues. This has resulted in cross-chain equipped layer-one protocols and layer-two solutions seeing increased volumes as traders search for non-centralized venues to interact with.
According to CryptoQuant CEO Ki Young Ju, after China announced a ban on all cryptocurrency transactions, major cryptocurrency exchanges like Huobi suspended services for accounts in mainland China.
This triggered an exodus of funds from Asia-based centralized exchanges (CEXs), and these funds were eventually deposited onto decentralized exchanges (DEXs) and the wider decentralized finance (DeFi) ecosystem.
Outflow transactions spiked after Huobi announced the suspension of existing accounts in mainland China.
Ironically, regulation led to decentralization this time. pic.twitter.com/EKpkHIdSv0
— Ki Young Ju 주기영 (@ki_young_ju) September 29, 2021
This phenomenon is particularly interesting and requires further investigation, given the assumed failure of Ethereum’s London hard fork in addressing untenable gas fees and the regulatory concerns mounting over the U.S. and China’s response to cryptocurrencies.
Let’s take a look at some of the recent thriving DEXs and popular protocols that are seeing an increase in inflows.
The Ethereum network
The Ethereum network is by far the most dominant smart contract and it hosts the largest and most used decentralized exchanges like Uniswap (UNI) and SushiSwap (SUSHI), according to data from Dune Analytics.
While the most recent cryptocurrency ban out of China dominated headlines in the last two weeks of September, the announcement was originally made on Sept. 3, around the same time that activity on Uniswap surged higher.
As shown in the graph above, the spike in Uniswap’s activity and trading volume actually began on Aug. 28 and remained elevated above its previous average for the next couple of weeks.
Uniswap has also benefited from its recent integrations with the newly released layer-two solutions Optimism and Arbitrum, which helped to lower the transaction costs and speed up confirmation times for users on the network.
The Fantom network
The Fantom protocol has risen in prominence in recent months thanks to the launch of a bridge to the Ethereum network and a 370 million FTM developer incentive program designed to attract new projects to the Fantom ecosystem.
Data from Token Terminal shows that while the announcement of the incentive program on Aug. 30 provided an initial boost in protocol revenue and token price, it wasn’t until after the regulatory announcement from China on Sept. 3 that activity and protocol revenue really experienced a sustained increase.
Fantom utilizes a directed acyclic graph architecture that enables a high throughput capability for near-zero fees, which has helped the protocol grow in popularity amongst DeFi and NFT traders who were priced out of conducting transactions on Ethereum.
SpookSwap and SpiritSwap are the two top DEXs on the Fantom network and together currently handle an average of $95 million in 24-hour trading volume.
The Avalanche network is a blockchain protocol that has been gaining traction since its mid-August launch of the Avalanche Rush liquidity mining incentive program, which includes more than $180 million worth of rewards and incentives designed to attract liquidity to the DeFi ecosystem on Avalanche.
Since the release of the incentive program in mid-August, the protocol revenue and token value for the native token AVAX have been on the rise as users transferred assets across-chain to engage in Avalanche’s growing DeFi ecosystem.
According to data from DefiLlama, the top DEXs on Avalanche are Trader Joe (JOE) and Pangolin (PNG), which combined currently see an average 24-hour trading volume of $355.2 million.
Decentralized Perpetuals Trading
Decentralized perpetuals trading protocol dYdX, which has exploded in popularity in September following the airdrop of its native DYDX token, has also seen an uptick in user activity and volumes.
According to data from Token Terminal, the daily trading volume on the exchange exploded in the final days of September, surging from an average below $2.1 billion to more than $9 billion on Sept. 27.
The regulatory crackdown has been especially hard on derivative and leveraged cryptocurrency exchanges like BitMEX and Binance, leading to an increase in demand for decentralized options like dYdX and Hegic.
While many across the cryptocurrency ecosystem lamented China’s crackdown on the crypto sector, their heavy-handedness may have actually turned out to be a blessing in disguise. It prompted traders to venture away from centralized exchanges and out into the rapidly expanding DeFi ecosystem where the ethos of decentralization and the ability to “be your own bank” is still available to those who seek it.
China Seeking Judicial Authority To Convict And Sentence Crypto Activities
Judicial interpretations are likely to be issued in the future.
The Chinese judiciary is reportedly investigating how to convict and sentence activity related to cryptocurrency.
* It is expected that judicial interpretations will be issued in the future, China-based crypto journalist Colin Wu tweeted Monday, citing Beijing political magazine Caijing.
* The current laws in China that make commercial activities involving crypto illegal cannot be applied, and so the government needs the judiciary to interpret them.
* Virtually all crypto trading was outlawed in China last month, when the exchange of one crypto for another was banned.
Caijing Magazine has suggested that the withdrawal of exchanges could see the criminal activities involved becoming more concealed.
Chinese Blockchain Project Bsn Expands To Turkey And Uzbekistan
Chinese blockchain project BSN comes to Turkey and Uzbekistan after launching the BSN Hong Kong and Macau portal.
The Chinese government-backed blockchain project, the Blockchain-based Service Network (BSN), continues expanding its global presence by setting up two new portals in Turkey and Uzbekistan.
Red Date Technology, the architect behind the BSN project, has signed an agreement with a Turkish consultancy firm, Turkish Chinese Business Matching Center (TUCEM), to launch two international BSN portals in Turkey and Uzbekistan in late December 2021.
Established in 2006, TUSEM became a major economic cooperation hub between Turkey and China. The company will be the exclusive operator of the two new BSN portals offering blockchain-as-a-service (BaaS) in Turkey and Uzbekistan.
The new portals will allow blockchain developers in Turkey and Uzbekistan to build BaaS applications using the global BSN portal hotsing major blockchains like the Ethereum network, Algorand, Polkadot, Tezos, ConsenSys Quorum, Corda and others.
The initiative aims to solve major challenges associated with developing blockchain applications, enable blockchain interoperability and cut development costs.
“Turkey has long played a role as a bridge between Asia and Europe and so it is fitting that the first BSN portal outside of Asia will be launched there,” Red Date Technology CEO Yifan He said.
Mehmet Akfırat, president of TUCEM and head of BSN Turkey, said that the BSN’s Turkish portal will contribute to social development and financial inclusion. According to the exec, both Turkey and Uzbekistan are highly engaged in blockchain development.
He told Cointelegraph that BSN doesn’t choose the locations for its international portals. “As long as we have good local partners in some regions, we don’t really mind where they are,” the exec said, adding that BSN is also talking to potential partners from the United States, Europe and Australia.
The CEO also noted that BSN does not operate its international portals. “They are all built and operated by our local partners. They own the portals, which leverage BSN infrastructure to build the most powerful BaaS site with little cost,” He said.
BSN recently launched a Hong Kong and Macau portal on Sept. 1, contributing to the development of more than 30 new blockchain projects. BSN also plans to set up an international BSN portal in South Korea in November.
In January 2021, the BSN announced plans to build a universal digital payment network for central bank digital currencies (CBDCs) — following even earlier intentions to support stablecoins for various services on the BSN ecosystem.
However, according to He, the BSN is no longer involved in “any CBDC-related projects” and has also abandoned its stablecoin plans.
“BSN no longer will integrate stablecoins. We move that plan to another entirely new project, which has no association with BSN. For BSN, we are focusing on expanding footprints in different countries,” He told Cointelegraph.
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