An uncertain future for China fintechs? Part 2

As a result of policy direction in China and its implications on investor sentiment, fintechs may face tougher paths to raise money in the markets where they generate their business.

Shanghai’s STAR market, China’s Nasdaq-like tech board, has boosted technology credentials for listing candidates. In the first four months of 2021, the exchange rejected 37 applications, compared with just three during the same period last year.

The regulator cited that those rejected lacked the core technology or scientific innovation to meet qualifications for the exchange.

The stricter vetting process was enough for JD technology to withdraw its IPO application at the end of March. The fintech arm for ecommerce group was expected to raise $3 billion. But the fintech is now reshuffling its businesses to become more ‘tech’ and less ‘fin’ in response.

“Tougher requirements will lead to better quality companies for investors,” said Britney Lam, chief investment officer for the LAM Group, a family office in Hong Kong. “Investor confidence in its disclosures will be improved if regulators lead the way by tightening listing rules.”

As other fintechs reassess their capital raising strategies as well, the road for Ant to revise its stalled IPO continues even if regulated closer to a finance company. “Ant is politically sensitive and sets the path for Tencent and others,” explained Lam.

Still, higher funding costs and less favourable regulatory markets have soured risk sentiment across the tech space. The market value for BAT (Baidu, Alibaba, Tencent) stocks have remained relatively unchanged since the end of October 2020, but underperformed its FANG (Facebook, Amazon, Netflix, Google) counterparts, which returned more than a fifth in market value over the same time.

An immediate market recovery or policy reversal is unlikely. Chinese authorities have long sided with maintaining social stability, as the sustained recovery following the pandemic provides the government with confidence that current policies have yet to derail the economy, said Eric Ritter, adjunct professor of economics at Lakeland University in Tokyo.

“2021 is also a politically sensitive year, representing the centenary anniversary of the CCP’s founding. Beijing will no doubt want to emphasise its assertive stance against the country’s tech giants, particularly when Washington struggles to do the same,” according to Ritter.

Besides riding an economy that expanded 18.3% in the first quarter of this year, to Beijing’s luxury, the structural factors supporting fintech remain too attractive for investors to ignore. Across China’s digital payment infrastructure, more than $30 trillion was spent last year across the 900 million smartphone users. The amount was double that spent in 2016, as the proliferation of QR codes rose in tandem with falling cash transactions.

Both fintechs and investors know that policymakers also confront a tough reality: Beijing needs the tech giants for China to thrive globally.

China’s ambitions to roll out its digital yuan relies on the digital payment infrastructure established by incumbents like Ant Group or Tencent’s WeChat Pay.

This tolerance is also evident by the actions taken. In addition to Ant Group’s restructure, Alibaba was fined $3 billion, representing just 4% of its 2019 revenue, less than the 10% threshold that represents the maximum penalty. These fines are not a coincidence – as it “remains that Beijing is not out to kill Alibaba but is clearly serious about addressing monopolistic practices in the e-commerce space”, according to Wood.

Following Alibaba’s fine, more than 30 tech companies have pledged compliance with the regulator. Most have invested heavily in other technologies for the digital economy as well, currying favour with authorities and demonstrating that Beijing’s message has been heard.

This is an excerpt from an article in the Summer 2021 issue of FinanceAsia

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