Global Source Partners
Andrew Collier | Sep 14, 2020
Summary
Ant Group’s proposed IPO, expected soon, raises the profile of China’s largest private online financial company. However, there are macroeconomic and political considerations that will affect the growth trajectory of both Ant and other private online financial firms. There are also competitive threats to Ant from the digitization policies at the PBOC and the online finance programs among the commercial banks. More generally, the company’s growth offers lessons on the role of online financial firms in China’s macroeconomy.
Some of our conclusions:
- Centralized digital currency: The PBOC is unlikely to compete with Ant and similar firms in digital transactions. Despite the introduction of a centralized digital currency, the PBOC’s main focus is on monetary policy and systemic risk – not consumer finance.
- Systemic risk: However, as digital finance increases in size, the risks of this sector’s impacting the macroeconomy increases. Due to new rules on online money management, Ant has shifted its business model to fees for transactions rather than directly managing assets. If digital payments begin to move bank assets to Ant’s platform, the PBOC is likely to step in once again to reduce Ant’s influence.
- Bank competition: The real risk to Ant comes from its competition with the banking industry. The increase in Ant’s “service costs” suggests that banks are demanding a larger fee for the services they are providing to Ant. This competition could stifle Ant’s growth in the future.
Among other costs, in 2019 Ant paid CNY46.7 billion in transaction fees, or 38.1 percent of its revenue, mostly for Alipay. Ant’s prospectus warns, “We cannot assure you that the transaction fee rate and any other fee or cost will not increase in the future.” It also earns significant revenue by acting as an agent for other financial firms, a revenue stream that could decline if the service providers, such as the politically dominant state banks, reduce Ant’s agency commission.
However, Ant Group’s prospectus carefully avoids disclosing precise details about fees paid or charged for financial payments or money management.
Global Source Partners
Conclusion
There is no doubt China is moving quickly to digitize its financial system – at least for those able to access capital to make purchases, borrow, and invest funds. The private sector through companies like Ant and Alibaba have a strong role to play due to China’s interest in encouraging the development of its technology sector. Unlike other aspects of China’s political and economic system, the central bank is primarily concerned with monetary policy and financial stability, not control of the entire financial system.
The issue of state control does, however, come into play with the question of the revenue streams for digital payments, fund management, and other digital services. Here, the state banks, which control approximately half of lending activity, are going to be prioritized over private competitors due to the importance of savings deposits and lending activity. That is the challenge for Ant.
From a risk point of view, Beijing would like to see the growth of its online domestic firms to improve economic efficiency. However, they need to balance those efficiency gains against a) control of financial capital, particularly bank deposits; and b) financial risk, as online firms have fewer regulatory constraints compared with brick-and-mortar firms. These political and regulatory conflicts are going to restrain the growth of the online sector.
(For full report, contact Global Source Partners)