Wednesday, June 16, 2021 | 07:24 am

Chinese Regulators Order Tech Companies to Standardize Financial Businesses

Chinese Regulators Order Tech Companies to Standardize Financial Businesses

On April 29, Chinese regulators from the China Banking Regulatory Commission, China Securities Regulatory Commission, and State Administration of Foreign Exchange announced that they have ordered 13 of China’s biggest tech companies, including Tencent and ByteDance, to “standardize” their online financial businesses. Regulators will likely require firms to spin off payments programs and may even eliminate some firms’ insurance, wealth management, and lending practices.

The People’s Bank of China stated that some of the firms will need to set up financial holding companies to house certain parts of their businesses. Financial holding companies are subject to heightened restrictions on their assumption of financial risk. (One commentator suggests that the imposition of capital requirements is meant to ensure that profits are shared more evenly between the tech intermediaries and the large state-owned banks that sometimes do the actual lending).

Many of these restrictions mirror those imposed on Ant Group earlier this year, including an obligation to sever “improper links” between core payments and financial services. Many firms’ lending programs could shrink significantly because the inflows from core payments often fuel the lending done in other businesses, and additional capital requirements will draw down available cash.

The regulators’ announcements of new instructions concerning the online financial business is an extension of months of government scrutiny of Chinese tech firms’ practices. In April, regulators called in 33 firms to discuss anti-competitive practices; they were instructed to come into full compliance with existing antitrust law by May 13. Though the deadline has not arrived, Meituan is already under investigation for its alleged monopolistic behavior and “abuse of market dominance”. Tencent is reportedly facing a $1.5 billion fine for failing to disclose past investments and acquisitions. In response to months of government scrutiny, several top tech firms have hired former regulatory officials to help defend the firms’ interests.

One commentator sees investment in Chinese tech as a bet on the relations between private firms and the government. Some suggest that the government is aiming for fewer cults of personality in the tech world, more data-sharing from tech firms to the government, and less influence for big tech shareholders in industries like health care and media. The latest regulations indicate a government’s desire to control domestic tech’s financial influence and ensure the centrality of state-owned banks as the economy moves online. The difference between controlling and suffocating an industry is small, and the government’s ultimate standard remains to be seen.

On May 3, Fidelity, the giant U.S. asset manager, reportedly cut its valuation of Ant Group in half from August 2020 to February 2021, in the wake of the regulatory crackdown.

U.S. Lawmakers Back Bipartisan Efforts to Counter China

In recent weeks, bipartisan coalitions in the U.S. Senate and House of Representatives have backed two major bills addressing U.S.-Chinese technology competition. On April 21, the Senate Foreign Relations Committee approved the Strategic Competition Act of 2021 by a vote of 21-1, sending it to the full Senate for approval. On the same day, bipartisan members of both houses of Congress introduced the Endless Frontier Act, calling for $100 billion in government funding for science and technology research over the next five years to compete with China’s technological progress. Strong bipartisan support for both bills underscores the growing willingness among both Republicans and Democrats to bolster America’s competitive edge over China in technologies with economic and national security implications.

The 280-page Strategic Competition Act contains provisions challenging China across a broad range of policy areas, including human rights, economic competition, international development, military and defense, and international cooperation. One provision would require U.S. officials (but not athletes) to boycott the 2022 Winter Olympics in Beijing, as recommended by the U.S. Committee on Religious Freedom. Another provision would further expand the role of the Committee on Foreign Investment in the United States (CFIUS) in scrutinizing international transactions involving Chinese actors, particularly vis-a-vis gifts and contracts with U.S. universities.

Sen. Bob Menendez, the Democratic chairman of the Senate Foreign Relations Committee, stated that the Strategic Competition Act would enable the U.S. to counter China “across every dimension of power: political, diplomatic, economic, innovation, and even cultural.” Republican Sen. Mitt Romney offered strong language, describing the legislation as a necessary but insufficient step toward countering “China’s march toward global hegemony”.

Meanwhile, a bipartisan group of lawmakers led by Senate Majority Leader Chuck Schumer introduced the Endless Frontier Act, which aims to enhance American competitiveness with China by fostering domestic technological progress and supply chain resilience. The bill provides $100 billion in funding for “technology areas critical to national security” and has been endorsed by the Biden White House. The bill would create a new Directorate for Technology and Innovation within the National Science Foundation and establish a regional technology hub program. Administrators at leading science and technology research universities have supported the Endless Frontier Act, but other universities have expressed concern over provisions of the Strategic Competition Act that would enable CFIUS review of Chinese grants and contracts.

The Strategic Competition Act and the Endless Frontier Act are both parts of an effort by Schumer, announced in February, to fast-track legislation facilitating U.S. leadership in its competition with China. The legislation has been met with criticism from Chinese officials, who have stated that it “reeks of Cold War and zero-sum mentalities”.