After levying a record-breaking fine against Alibaba and requiring sweeping structural changes to Ant Group’s business earlier this month, Chinese regulators are showing no signs of letting up in their crackdown on big tech. Several news outlets reported this week on looming fines and regulatory overhauls at companies including Tencent, ByteDance, JD.com and others. On Thursday, the Wall Street Journal’s Lingling Wei and Stephanie Yang reported that China’s central bank had ordered 13 tech companies to follow much tighter rules relating to their use of big data in extending loans to consumers:

China is reining in the ability of the country’s internet giants to use big data for lending, money-management and similar businesses, ending an era of rapid growth that authorities said posed dangers for the financial system.

[…] Their aim, say analysts, is to curb a revolutionary business model that let China’s Big Tech develop and use powerful payment apps and other information about hundreds of millions of users.

[…] Under the guidelines regulators released Thursday, the tech firms must “disconnect the improper connection between payment tools and other financial products.” The vague language indicates that the ability for the firms to channel funds from their payment apps into lending and money-management activities would be severely curtailed.

[…] Regulators also want to limit the use of the payment apps by the corporate sector, which could significantly hurt the growth of the tech firms’ payment business. In addition, by trying to break what the central-bank statement calls control over data, the People’s Bank of China signaled its intention to get the tech giants to share their troves of consumer-credit data. [Source]

The central bank’s demand that companies disaggregate payment tools and other financial products is a significant one. Many tech companies, from food delivery service Meituan to ride-hailing service Didi Chuxing, not to mention the two e-payment behemoths WeChat Pay and Alipay, have bundled loan services into their apps, virtually drowning users in offers for loans. As the Wall Street Journal’s Keith Zhai explained, the requirement that many companies no longer offer financial services beyond payments will force a major re-engineering of these apps: 

Regulators’ push to delink the technology companies’ broader suites of financial products and services from their core payments platforms, if carried out, would deal a blow to a lucrative business model pioneered most successfully by Ant Group Co., the financial-services giant controlled by billionaire entrepreneur Jack Ma.

“In the past, payment was the end of all transactions, but now payment has become the beginning of all transactions,” Ant’s then-chief executive Simon Hu told Chinese media last year.

[…] Ant’s Alipay mobile app, which started out as a basic payments platform, has branched out to provide other services to its more than one billion users. One of its most popular features has been its microloans service, accounting for nearly 40% of total sales in the first half of 2020, according to the company.

[…] Ant is discussing with regulators the possibility of transferring some of its app-based financial services to another of its apps, called Ant Fortune, which has lain dormant for years—barely updated since the company decided to merge most of its functions into Alipay, the two people said. [Source]

While the new rules about in-app financial services are set to affect a range of companies, particular attention is being focused on Tencent by China’s market regulator. This week, Reuters’ Pei Li and Julie Zhu reported that the State Administration for Market Regulation (SAMR) was preparing a landmark fine against the company for failing to report past acquisitions and investments:

Tencent should expect a penalty of at least 10 billion yuan ($1.54 billion), significant enough for the State Administration of Market Regulation (SAMR) to make an example of it, both people said.

[…] SAMR’s investigation partly focuses on Tencent Music Entertainment Group (TME.N), which was spun off and listed in the United States in late 2018, two of the people and an additional two sources close to the business said. Tencent Music Entertainment did not immediately respond to request for comment.

The regulator has informed Tencent that it should expect a fine, give up exclusive music rights, and may even be forced to sell the acquired Kuwo and Kugou music apps, said the people.

However, Tencent’s core businesses, video games and WeChat, are likely to remain intact, said one of the people. [Source]

Amid the slew of fines and regulatory orders, it has become clear that what started with a crackdown on Jack Ma’s business empire has quickly expanded to become a turning point for the broader tech industry in China. Earlier this month, The Economist analysed the implications of the Chinese government’s tightening grasp over the tech sector:

[China’s tech moguls] and their shareholders, who include plenty of Western funds, are grappling with three poorly understood developments. After years of tolerating big tech’s unbridled expansion, the central government is rewriting the rules, some tacit and some explicit, for how billionaires can behave, the degree of overt state control over data, and who owns the firms’ other assets, including stakes in other businesses. This new master plan for Chinese big tech will transform one of the world’s most innovative and valuable industries.

[…] A second set of questions concerns the government’s designs for the firms’ most valuable resource—data. Its objective is to pool data and impose more state ownership and control, which could eventually amount to a kind of nationalisation. The digital firms have built some of the world’s largest and most advanced databases, which assess everything from users’ loan repayments to their friend networks, travel histories and spending habits. Ant alone is said to hold data on more than a billion people, on a par with Facebook and Google. Because of the breadth of services that many Chinese “super-apps” encompass, they have an even richer picture of users. [Source]