China called financial apps the best thing from the compass. Not anymore.

When the coronavirus crippled the Chinese economy last year, Rao Yong needed money to bail out his online crafts business. But he dreaded the idea of ​​spending long, boring hours in the bank.

The epidemic had blasted delivery services and slowed customer payments, so Mr. Rao, 33, used an app called Alipay to receive an advance payment on his bills. Because her Alipay account was already linked to her digital storefront at Alibaba’s Taobao bazaar, getting the money was quick and painless.

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

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

China has been a pioneer in finding new ways to get money for underserved people like Mr. Rao. Tech companies like the owner of Alipay, an Alibaba spinoff called Ant Group, have turned finance into a kind of digital plumbing: something embedded so deeply and invisibly into people’s lives that they hardly thought about it. And they’ve done it on a colossal scale, turning tech giants into influential lenders and fund managers in a country where smartphones became ubiquitous before credit cards.

But for much of the past year, Beijing has erected new regulatory walls around so-called fintech, or fintech, as part of a growing effort to curb the nation’s internet industry.

The campaign tricked Alibaba, which was fined $ 2.8 billion in April for monopoly behavior. He tripped Didi, the ride-hailing giant, who was formally investigated over its data security practices just days after listing its shares on Wall Street last month.

Around the same time last year, Ant was also preparing to hold the world’s largest public offering. The IPO never happened, and today Ant is revamping its business so that regulators can treat it more like what they think it is: a financial institution, not a tech company.

In China, “the reason fintech has seen such growth is due to a lack of regulation,” said Zhiguo He, who studies Chinese finance at the University of Chicago. “It’s so clear.”

Now the question is: what will regulation do to an industry that flourished precisely because it offered services that the Chinese state-dominated banking system could not provide?

With Ant and other major platforms cornering the market, investment in Chinese fintech has plummeted in recent years. So Ant’s retribution could make the industry more competitive for start-ups. But if running a large fintech company means being regulated like a bank, will the founders of future Ants even bother?

Professor He said he was mostly convinced that Chinese fintech entrepreneurs would keep trying. “Whether it’s extremely profitable,” he said, that’s another question.

For much of the past decade, if you wanted to see where smartphone technology made China the most different from the rest of the world, you would have looked into people’s wallets. Or rather, the apps that replaced them.

Rich and poor alike have used Alipay and Tencent’s WeChat messaging app to buy snacks from street vendors, pay bills, and send money to friends. State media hailed Alipay as one of the four great modern inventions, put it and bike sharing, e-commerce and the bullet train up there with the compass, gunpowder, papermaking and printing.

But tech companies haven’t stepped into the financial sector to facilitate payment for coffee. They wanted to be where the real money was: grant credits and loans, manage investments, offer insurance. And with all their data on people’s spending, they thought they’d be much better than old-school financial institutions at managing risk.

With the blessing of Chinese leaders, financial arms have started to come out of internet companies of all kinds, including search engine Baidu, retailer, and food delivery giant Meituan. Between 2014 and 2019, consumer credit from online lenders almost quadrupled each year on average, by an estimation. Almost three quarters of the users of these platforms were under 35, according to iiMedia Research.

Last year, when Ant filed for an IPO, the company said more than $ 260 billion in credit was extended to consumers on Alipay. This meant that Ant alone was responsible for more than 12% of all short-term consumer loans in China, according to research firm GaveKal Dragonomics.

Then, in November, officials torpedoed Ant’s IPO and got to work dismantling the plumbing that had connected Alipay to Chinese banks.

They ordered Ant to make it less convenient for users to pay for their purchases on credit – credit that was largely funded by banks. They prohibited banks offer deposits through online platforms and how much banks could lend through them. At some banks, deposits offered through digital platforms made up 70% of their total deposits, a central bank official said. in a speech.

In one briefing Central bank vice-governor Fan Yifei last week said regulators would soon apply full Ant treatment to other platforms.

“On the one hand, the speed of development has been amazing,” Fan said. “On the other hand, in the pursuit of growth, there have been monopolies, disorderly expansion of capital, and the like.”

Ant declined to comment.

As an ant and Tencent are scrambling to meet the demands of regulators, they have cut credit services for some users.

A big blow to Ant’s bottom line could come from new requirements that she spends more of her own money on loans. For years, Chinese regulators didn’t like the idea of ​​Alipay competing with banks. So Ant instead played its role as a partner of the banks, using its technology to find and assess borrowers while the banks staked out funds.

Now, however, this pattern is emerging in Beijing as a convenient way for Ant to place bets without being exposed to downside risks.

“If problems arose, that would be for sure, but its partner banks would take a hit,” said Xiaoxi Zhang, Beijing analyst at GaveKal Dragonomics.

When Chinese regulators think of such risks, it’s people like Zhou Weiquan that they think of.

Mr. Zhou, 21, earns about $ 600 a month from his office job and wears his hair in a reddish-brown mullet. After she turned 18, Alipay and other apps started giving her thousands of dollars in credit per month. He took full advantage of it, traveling, buying gadgets and generally not thinking about how much he was spending.

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

“For young people who really like to overspend, it’s a good thing,” Zhou said of the crackdown.

China’s recent rapid economic growth has most likely made policymakers more comfortable with mastering fintech, even at the expense of some innovations, consumer spending, and borrowing.

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

Qu Chaoqun, 52, was delighted a few years ago to discover that he had access to $ 30,000 per month on several applications. But he wanted more. He started buying lottery tickets.

Soon enough, Mr. Qu, a takeaway delivery driver in the Guangzhou mega-city, was borrowing on one app to pay his bills on another. He borrowed from friends and relatives to repay the apps, then borrowed again from the apps to repay his friends and relatives.

When his credit was nearly halved in April, he fell into what he calls a “bottomless abyss” as he struggled to pay off his outstanding debts.

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

Albee zhang contributed research.

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