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Ant Group’s suspended initial public offering (IPO) shed further light on a possible motivation behind China’s digital yuan. The Chinese government appears to view the payment giant as a destabilizing force for the Chinese economy, and the digital yuan is one way to keep companies like this in check.
Industry watchers say the People’s Bank of China (PBoC) could use the digital yuan as part of a broader effort to curb the growth of Alipay and WeChat Pay. The central bank’s digital currency (CBDC) could hamper Alipay’s microloan business and provide financial services to non-banks, while also withdrawing deposits for commercial banks.
Ant’s IPO highlights the flaws in the digital payments industry and China’s central bank is motivated to launch the digital yuan and give itself more power to keep third-party payment platforms in check, said Tanvi Ratna, CEO of fintech think tank Policy 4.0. Policy 4.0 worked on an extensive research report on China’s national digital currency to be released on November 18.
The Shanghai and Hong Kong exchanges halted Ant’s $ 35 billion double IPO last week after Chinese financial regulators raised concerns about Ant’s micro-lending boom, which could add more debt to the highly-rated economy. debt of the country.
Ant Huabei’s co-loan subsidiary, which is a virtual credit card integrated into Alipay, facilitates lending between commercial banks and borrowers, while Jiabei is the provider of short-term consumer loans. While it benefits from a reduction in loan interest rates of up to 40%, Alipay bears much less credit risk than banks. According to the IPO prospectus, only 2% of the loans that Ant had facilitated in June were on the balance sheet.
One way for the central bank to control Alipay’s lending activity is to require the company to convert cash into digital yuan to take out consumer loans.
“The bank may make it more expensive for digital payment platforms to use the digital yuan to lend money, and that may be something the government might want to force,” Ratna said.
A day before Ant’s IPO, China’s leading financial regulators released a consultation paper requiring online lenders to provide at least 30% of any loans they co-finance with banks, making it harder for Ant to lend money.
Ant’s boom in lending has hit the nerves of China’s top financial regulators at a time when the country is already battling rising insolvency risks and weak banks. To curb the growing influence of fintech giants on the country’s economy, Beijing authorities proposed a new set of anti-monopoly practices on fintech companies on Wednesday.
“China is very aware of its debt problem. Many businesses have no cash flow, especially after the coronavirus pandemic, “Ratna said.” Ant is withdrawing personal loans, many of which may go bad. ”
Alipay has not always been available in reporting data on consumer loans to Chinese banks. Although Huabei and Jiebei were launched in January 2018, they did not share the data with the central bank until the end of July this year, at the request of the central bank.
The digital yuan can increase transparency and financial efficiency by helping banks better monitor and analyze impaired assets, Ratna said.
“For the central bank, it is very important that the underlying asset becomes the digital yuan,” he said. “It can help the bank solve many chronic problems in the financial system, including shadow banking, bad loans and too much informal financing.”
Loss of deposits
Chinese payment giants also pose other threats. Commercial banks in China have lost cash deposits to non-bank payment platforms. The Chinese mobile banking market recorded transactions worth around $ 8 trillion in the last three months of 2019, with Alipay taking 55% of the market and WeChat Pay 39%.
Alipay has one of the largest money market funds in the world called Yu’e Bao, which is essentially a mutual fund that usually invests in safe asset classes like treasury bills to earn higher interest than many savings accounts. in commercial banks. Its users tend to put their in-app money into the fund. With other similar funds on its distribution platform, Alipay had nearly $ 600 billion in total assets as of June.
“The loan / deposit ratio determines how much money a commercial bank can lend,” said Aurora Wong, vice president of cryptocurrency firm ZB Group. “More cash deposits allow banks to lend more, which is one of the most profitable assets as it earns interest.”
Chinese commercial banks need to maintain or increase their deposit base to keep up with lending, especially as the economic slowdown deepens.
Some commercial banks in China hope that retail depositors will use the digital yuan in their payment transactions. When users convert virtual currency back to fiat, the money will remain in bank accounts rather than mobile payment apps.
The latest attempt to encourage mass adoption of the digital yuan was a $ 1.5 million gift from the PBOC in October for the citizens of Shenzhen, Wong said.
Each of the 50,000 entrants, who downloaded the digital wallet, would be selected in a sweepstakes to receive approximately $ 30 during the one-week campaign. Shops in Shenzhen have posted the QR code to allow wallet users to scan and pay for their purchases.
The benefits of the digital yuan for Chinese commercial banks extend beyond the increase in cash deposits. With a larger user base, banks will have more transaction data to profile consumers, analyze their online behavior, and experiment with different ways to monetize the data.
“Commercial banks in China are becoming more like fintech companies,” Wong said. “I think this will not be the last gift of virtual currency and there will be even more programs to incentivize consumers to use commercial bank wallets.”
Mass adoption
However, Alipay and WeChat Pay hinder the mass adoption of the digital yuan. During last month’s trial giveaway, some buyers preferred to use these two mobile payment apps because they are more convenient.
“The adoption issue is difficult for central banks,” Ratna said. “This is the daily bread for a startup, but it is not something that central banks have experienced.”
Favorable regulatory policies for the digital yuan, unique technical features that allow non-bank users to access basic financial services, and improve the user experience for native digital wallets are among the most likely ways to increase mass adoption of the yuan. digital.
A technical feature that distinguishes digital yuan from Alipay in terms of payment is that users do not need a bank account to link to a mobile app to transact with cash.
According to a 2017 report from Global Findex, China has more than 225 million people without a bank account, which is one of the largest bank-free populations in the world.
The digital yuan account has a sliding scale of Know-Your-Customer (KYC) requirements corresponding to the amount of digital yuan you want to own and use, said Chuanwei Zou, chief economist at blockchain infrastructure firm PlatOn.
“The more identity information you register with the yuan digital wallet, the more digital yuan you can have in the wallet,” Zou said.
For Alipay and WeChat Pay, their users must register with their bank accounts, which require a government-issued ID. The app will also use facial recognition and cell phone numbers to verify identities.
Users with only a few thousand dollars equivalent in their digital yuan wallets could remain completely anonymous, which would be beneficial for many small retail depositors in China, Zou said.
Decoupling a bank account also helps foreigners in China and those who have demand for renminbi transactions outside the country. The central bank plans to launch a trial during the Beijing Winter Olympics in 2022, where foreigners in China can directly exchange other fiat currencies for the digital yuan without carrying cash or opening a bank account.
The digital yuan allows foreigners to buy goods and services in China, and allows anyone outside of China to transfer funds across the border, without using a bank account as the virtual currency will be part of a closed system run by the PBOC, Zou said. .
“The digital yuan is sure to change the structure of the digital payment market in terms of last-mile adoption,” said Zou. “We already have commercial banking mobile apps, Alipay and WeChat Pay, and there would probably be a native app for virtual currency, which can be a standalone app but can also be integrated into third-party payment apps.”
China’s four major commercial banks have included the digital yuan account in their mobile apps, while the central bank has not yet allowed Alipay and WeChat Pay to integrate digital yuan as a payment option into their apps.
Like many other significant policy changes, the Chinese government has approached its national virtual currency initiative in a trial and error fashion, Ratna said.
“The central bank hasn’t played all its cards yet,” he said.
