Ant: digital renminbi poses big risk to payments business

State economic activity can easily crowd out the private kind. Alibaba investors should therefore be wary of China’s enthusiasm for the digital renminbi. This central bank digital currency poses a threat to Alipay, the payments business of Alibaba affiliate Ant Group.

That should take some of the heat out of a rally in Alibaba shares. The stock rose about 9 per cent following regulatory approval of a Rmb10.5bn ($1.5bn) financing for Ant’s separate consumer unit.

The capital boost will permit the business to pursue growth in lucrative online lending. Ant was forced to postpone investment after the government crushed plans for an initial public offering in 2020.

More broadly, investors hope that government crackdowns on the tech sector have ended. Other big tech stocks have risen too. China’s battered economy desperately needs a boost. The authorities have approved a large batch of previously restricted blockbuster games for companies such as Tencent.

But there is also reason to be cautious. The plan makes the city of Hangzhou the second-biggest shareholder of the key Ant unit. Consumer financial data, which gives Ant an edge, may find its way to the government more easily. The consumer business may be regulated strictly as a state-owned, traditional lender, as opposed to a tech group.

Investors should recall the original reason for the crackdown on Ant. Beijing wanted to curb the power of tech platforms, especially in digital payments. Alipay, Ant Group’s wholly owned payments service, operates China’s biggest payments network.

After the authorities squashed Ant’s listing, the Chinese central bank took advantage of tech disarray to test digital renminbi payments via digital wallet apps, notably Alipay. Those pilot studies were successful. As the rollout widens, private payments groups may be reduced to being providers of plumbing in a financial system where payments are closely monitored and controlled by the government.

Last year, shares of Alibaba rallied multiple times at any sign of a rapprochement with Beijing towards Ant. The rallies were shortlived. State participation in the Ant consumer financing shows the authorities will continue tightening their grip on Chinese fintech, rather than the reverse.

The Lex team is interested in hearing more from readers. Please tell us what you think of the digital renminbi in the comments section below