China Named Its Finance Apps The Best Thing Since Compass. No longer.

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When the coronavirus is stuck ChinaIn Rao Yong’s economy last year, he needed cash to tackle his online craft business. But he dreaded the idea of ​​spending long, boring hours at the bank.

The outbreak battered delivery services and slowed customers’ payments, so Mr. Rao, 33, An app called Alipay to get early payment on their bills. Receiving the money was quick and painless, as the Alipay account was already linked to Alibaba’s digital store in the Taobao marketplace.

Alipay had helped Mr. Rao a few years ago when his business was just starting to expand and he needed $50,000 to set up a supply chain.

“If I had gone to a bank at that point, they would have ignored me,” he said.

China pioneer Finding new ways to get money for underserved people like Mr. Rao. Tech companies like Alipay’s owner, Alibaba’s Ant Group subsidiary, have turned finance into a kind of digital plumbing: It’s so pervasive and invisibly embedded in people’s lives that they hardly think about it. And they’ve done it on a massive scale, turning tech giants into influential lenders and money managers in a country where smartphones were ubiquitous before credit cards.

But for much of the past year, Beijing has been putting new regulatory walls on so-called fintech or fintech circles as part of an expanding effort to rein in the country’s internet industry.

The campaign trapped Alibaba. $2.8 billion fine in April for monopolistic behavior. She tripped Didi, the equestrian giant she hit. an official investigation data security applications after a few days. lists its shares on Wall Street last month.

This time last year, Ant was also getting ready to hold on. world’s largest public offering. The IPO never happened and today Ant overhaul so regulators can treat it more as they believe it to be: a financial institution, not a tech company.

“The reason fintech has grown so much in China is due to a lack of regulation,” said Zhiguo He, who studies Chinese finance at the University of Chicago. “This is very obvious.”

The question now is: What will regulations do to a booming industry precisely because it offers services that China’s state-run banking system cannot provide?

Chinese fintech investment has plummeted in recent years, as Ant and other major platforms have taken over the market. So Ant’s upbringing can make the industry more competitive for beginners. But if running a large fintech company means being audited like a bank, would future Ants founders be bothered?

Professor He said he is confident that mostly Chinese fintech entrepreneurs will keep trying. “Whether it is highly profitable” is another question.

For most of the past decade, if you wanted to see where smartphone technology made China the most different from the rest of the world, you’d look at people’s wallets. More precisely, the apps that replace them.

Rich and poor alike used Alipay and Tencent’s WeChat messaging app to buy snacks from street vendors, pay bills and zap your friends. State media hailed Alipay as one of China’s leaders four great modern inventions, put there and bike-sharing, e-commerce and high-speed train with compass, gunpowder, papermaking and printing.

But tech companies didn’t get into the finance business to make it easier to pay for coffee. They wanted to be where the real money was: lending and lending, managing investments, offering insurance. And with all their data on people’s spending, they believed they would be much better at handling risks than old-fashioned financial institutions.

With Blessing of China’s leadersFinance branches are beginning to sprout from internet companies of all kinds, including search engine Baidu, retailer JD.com, and food delivery giant Meituan. Between 2014 and 2019, consumer loans from online lenders nearly quadrupled on average each year. a guess. About three-quarters of users of such platforms under 35, according to iiMedia Research.

Last year, when Ant filed to go public, the company said it had loaned more than $260 billion to consumers in Alipay. This meant that Ant alone was responsible for more than 12 percent of all short-term consumer loans in China, according to research firm GaveKal Dragonomics.

Later in November, authorities torpedoed Ant’s IPO and began dismantling the plumbing connecting Alipay to Chinese banks.

They ordered Ant to make it less convenient for users to pay for purchases made on credit, which is largely financed by banks. Them banned banks from offering deposits through online platforms and restricted How much can banks lend? through them. A central bank official said deposits offered through digital platforms at some banks account for 70 percent of their total deposits. in a conversation.

In news briefing Last week, central bank vice-president Fan Yifei said that regulators will soon apply the full Ant treatment to other platforms.

“On the one hand, the pace of development was surprising,” said Mr. Fan. “On the other hand, monopolies in pursuit of growth, uneven expansion of capital, and so on have emerged.”

Ant declined to comment.

ant and Tencent While struggling to meet the demands of regulators, they have reserved loan services for some users.

It could take a big hit to Ant’s bottom line new requirements He said he had put in more of his own money for the loans. For years, Chinese regulators have disliked the idea of ​​Alipay competing against banks. Instead, Ant has taken on the role of a partner in banks, using its technology to locate and assess borrowers as banks allocate funds.

But now, this model seems like a useful way for Beijing to bet without incurring downside risks to the Ant.

“If problems arise, it will be safe, but their partner banks will take a hit,” said Xiaoxi Zhang, an analyst in Beijing with GaveKal Dragonomics.

When Chinese regulators think of such risks, they have people like Zhou Weiquan in mind.

Mr. Zhou, 21, earns around $600 a month in his desk job and wears his hair in a choppy, reddish-brown mullet. After he turned 18, Alipay and other apps started lending him thousands of dollars a month. He took full advantage of it by traveling, buying gadgets, and often without thinking about how much he spent.

After Alipay lowered its credit limit in April, her first reaction was to call customer service in a panic. But he says he’s since learned to live within his means.

“This is a good thing for young people who really like to overspend,” Mr. Zhou said about the restriction.

China’s recent brisk economic growth has likely made officials more comfortable reining in fintech, even at the expense of some innovation and consumer spending and borrowing.

“When you consider that household debt as a share of household income is currently among the highest in the world,” said Michael Pettis, professor of finance at Peking University, “then more household debt is probably not a good idea.”

Qu Chaoqun, 52, was thrilled to learn that he had access to $30,000 a month on various apps a few years ago. But he also wanted more. He started buying lottery tickets.

Not long after, Mr. Qu, a takeaway driver in the mega city of Guangzhou, started borrowing from another app to pay his bills. He borrowed apps from friends and relatives to pay back, then borrowed apps again to pay back to friends and relatives.

When his loan was nearly cut in half in April, he fell into “a bottomless abyss” trying to pay off his outstanding debts.

“People inevitably have psychological fluctuations and impulses that can bring great harm and instability to themselves, their families, and even society,” Qu said.

Albee Zhang contributed to research.

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