It was unprecedented.

On Nov. 2, China suspended a blockbuster initial public offering of financial technology giant Ant Group Co. two days before its planned debut on the Hong Kong and Shanghai stock exchanges. Ant was on track to rake in about $34.5 billion (about ¥3.6 trillion) with investors already subscribing to the IPO.

The fact that a single digital financial company was about to raise ¥3.6 trillion quite easily proved the market’s confidence in the future of China’s digital society.

But at the same time, it underlined Beijing’s determination to be strict on those who go against the government. And the incident appears to symbolize the Chinese government’s stance on digital giants going forward.

Ant’s IPO suspension came days after a controversial speech made by the group’s co-founder Jack Ma at a forum in Shanghai on Oct. 24.

Speaking in front of top government officials, Ma sarcastically criticized Beijing for its tight regulation, based on an outdated system.

“There’s no systemic financial risks in China because there’s no system in China,” Ma said.

Why did he make such a bold statement? And where is China heading amid its so-called digital revolution?

The answers may lie in the growth of tech conglomerate Alibaba Group Holding Ltd., from which Ant spun off.

Alibaba is one of the largest platforms in Asia, having quickly expanded its business centering on e-commerce systems such as Taobao’s customer-to-customer (C2C) services and Tmall’s business-to-customer (B2C) services.

Its business expanded into logistics, finance, cloud computing, AI and semiconductors, posting about ¥87 trillion in total gross merchandise value (GMS) in 2019, up 19% from the previous year, according to Toshihiko Okano’s book “China Digital Innovation.”

Online payments

Ant’s rapid growth can be attributed to its business philosophy, with problem-solving as its main pillar. It has constantly aimed for better service quality for consumers and companies using digital technology.

A typical example is online payment platform Alipay, which is also available in Japan.

Alipay has offered consumers and small businesses a reliable and speedy service for exchanging goods for money, and is fast taking the place of credits cards and cash. | REUTERS
Alipay has offered consumers and small businesses a reliable and speedy service for exchanging goods for money, and is fast taking the place of credits cards and cash. | REUTERS

In China, settling payments between individuals or small and midsized businesses and consumers via credit cards or cash was seen as a constant headache.

Sellers had a hard time collecting money in exchange for the goods they sold. Buyers weren’t able to receive the products they paid for. Alipay solved those problems through its escrow payment system that allowed electronic transactions with Alipay securing the transaction.

Together with its rival Tencent Holdings Inc.’s WeChat Pay, Alipay expanded nationwide with its safe, simple and low-cost payment method.

Ant ended up becoming the world’s largest fintech group with the rapid growth of its Yuebao financial investment products and Xiang Hu Bao online mutual aids insurance, backed up by its enormous funds-collecting capabilities from Alipay.

In 2014, Alibaba was listed on the New York Stock Exchange, raising $21.8 billion (about ¥2.27 trillion). At the same time, it accelerated investment and the acquisition of related businesses worldwide, across finance, commerce and industry, forming a business ecosystem that could be referred to as the “Alibaba Empire.”

The network has expanded widely to other countries in Asia, including Japan, along with the Alibaba business model.

From around 2016, Alibaba shifted its business focus to consumer-to-business (C2B) services, aiming to become a data technology company.

Ma saw a future in the C2B services, or companies developing products and services based on consumer needs, and dived in, utilizing AI and big data. For this, he also invested significantly in research and development.

During a recent presentation by Jiang Xiaojuan, the dean of Tsinghua University School of Public Management, a video showed a large number of buyers quickly matching up with manufacturers via a C2B platform, enabling machine parts to be produced.

This is something that can only be done in China, which has a wide range of manufacturing companies, an advanced distribution network and data technology companies that operate everything through artificial intelligence.

Although it is still in its initial stages, it is only a matter of time before data technology companies develop further technology that will add more speed and quality to its production and services and ultimately drastically change China’s industrial landscape.

The world felt both envious and threatened by Alibaba, China’s digital front-runner.

The mixed sentiment was shared by Beijing as well, which will be explained later.

Shift in government policy

This rapid growth of China’s digital economy can be partly attributed to government policy.

At first, the government didn’t have a clear-cut policy. But as it began to deal with digital companies, its stance changed — from simply letting them do their business with minimal interference, to offering more support as they quickly expanded their businesses and tightening control once they became mega-firms.

Ant Group's Alipay digital payment system has become ubiquitous in China over the past decade. | REUTERS
Ant Group’s Alipay digital payment system has become ubiquitous in China over the past decade. | REUTERS

Chinese authorities didn’t interfere at first simply because they didn’t have a comprehensive policy on digital companies. But as more digital companies became prosperous, local governments started offering benefits and tax exemptions in various ways, including offering land at cheap prices and partially exempting income tax for executives.

For local governments, they were prospective companies that would bring jobs, human resources, technology and tax revenues to their areas in the future. They wanted to make sure the companies would not move elsewhere.

Big cities such as Beijing, Shanghai and Shenzhen have also shown some form of preferential treatment toward these companies to varying degrees and the Chinese government has blocked foreign competitors through various measures.

As for Ant, whose IPO has been suspended, it has benefited not only from local government initiatives, but also from the central government.

When Ant was struggling to compete against existing banks and asset management companies, the government coordinated with relevant parties, ending up helping Ant by granting a license as an online financial entity.

There is no doubt that the Chinese leadership saw a future in the digital economy.

Getting a financial license became a driving force for Ant’s growth, leading to it becoming the world’s largest fintech company.

Tightening controls

As companies become bigger and more powerful, the government naturally tries to tighten control, especially over any company that gains the potential to become a force that could be seen as undermining the nation and society.

China halting of Ant’s IPO was a clear message from Beijing.

In 2019, the People’s Bank of China started requiring Alipay, WeChat Pay and other online banks to deposit 100% of their charged funds in the central bank’s checking account.

This is because the central bank was having a hard time implementing monetary policies, including currency operations, as the huge amount of smartphone payments distorted the structure of the financial system of the yuan.

What the government aimed for was ensuring financial stability. But with the policy change, Ant no longer was able to manage funds at a low cost.

Recent rumor has it that Chinese authorities will further impose capital restrictions and interest rate caps, which might have led to Ma’s criticism toward the government.

Chinese Vice President Wang Qishan recently warned that a balance is needed between encouraging financial innovation, invigorating the market and opening up the financial sector. | KYODO
Chinese Vice President Wang Qishan recently warned that a balance is needed between encouraging financial innovation, invigorating the market and opening up the financial sector. | KYODO

Ma argued at the Bund Summit in Shanghai that digital finance using big data algorithms is completely different from existing collateral-based banking operations.

In the same forum, however, China’s Vice President Wang Qishan warned that new financial technology also comes with increased financial risk.

“There should be a fine balance between encouraging financial innovation, invigorating the market, opening up the financial sector and building regulatory capacity,” he warned.

With the Chinese financial market suffering from companies with excess debt, causing existing financial institutions to restructure, the government can no longer ignore the perceived creative destruction by fintech companies.

The Chinese government seems to be lashing out at Ma, who, as a 50.5% shareholder of Ant, made billions out of his business, and showing him the consequences for criticizing the government.

But at the same time, Beijing won’t bring down Ant, because the cost of destroying the digital ecosystem is too high.

Instead, it will try to tame it. It is possible for Chinese authorities to demand “disciplined management” through a party organization within Ant, and replace executives if needs be.

Authorities have already taken action against electronic payment platforms such as Alipay and WeChat Pay.

Overseas, people are more interested in whether China’s digital yuan can crack the dominance of the U.S. dollar. But unless the yuan’s exchange and capital accounts are liberalized, the digital yuan alone won’t be able to achieve that goal.

The more realistic option is for the digital yuan to replace China’s electronic payment system, which is likely to have a significant impact on Alipay’s business.

If they want, authorities should be able to allow Alipay to effectively replace the digital yuan without changing its name, which will allow the central bank to grasp the details of Ant’s business from its flow of digital money.

Whatever is on Beijing’s mind, one thing is clear from Ant’s IPO postponement — Ma’s “dream” was considerably different from the “Chinese dream” Beijing had in mind.

With companies becoming enormous in size and digitalization taking root in society, Beijing’s policy — from simply letting them do their business without interference, to offering more support as they quickly expand and tightening control once they have grown enough — is now coming to a turning point.

The Chinese government’s response to such platforms — a potential third force in society — is now being tested.

‘Despotic Leviathan’

A digital revolution using AI and big data is a technological revolution that fundamentally changes the social form of mankind. There is no doubt that China is key to this revolution.

But will Beijing continue to remain at the center of digitalization?

MIT’s Daron Acemoglu and the University of Chicago’s James Robinson, authors of “The Narrow Corridor: States, Societies, and the Fate of Liberty,” wrote that China, which they claim is entering the state of “despotic Leviathan,” or becoming a despotic nation, is unlikely to make constant innovation.

It is because the power of the society, or the people, to restrain China’s centralized state powers is too weak, they argue.

The power of “society” in that context is weak. But how should we explain the continuous innovations of the digital economy occurring one after another? It is a remarkable achievement.

One thing to note is that China’s economic freedom is not as constrained as it seems to overseas observers.

Freedom in the digital economy, in particular, may be more vigorous than the average developed country due to inadequate legal systems.

With the “economic freedom,” and the enormous demand of 1.4 billion people, young and hungry Chinese entrepreneurs are challenging themselves, driven by a seemingly endless source of creativity, profit and competition. That is the source of China’s exponential digital economic growth.

Beijing is taking in, promoting and utilizing that creativity in various fields for its own governance and development.

Alongside Alipay, WeChat Pay is helping to revolutionize China's digital economy. | REUTERS
Alongside Alipay, WeChat Pay is helping to revolutionize China’s digital economy. | REUTERS

At the very least, it is hard to deny that China has strengthened its economic power through an authoritarian government and the people prospering under that political system.

Naturally, economic growth alone cannot empower Chinese society and realize the security, safety and happiness of its people.

It is also true that the stronger the nation becomes, the more difficult it becomes to reign in the “despotic Leviathan” status of the state.

Judging from past history, this problem remains China’s biggest challenge. The real question is when the turning point will arrive.

Digital future

We do not know exactly what China’s digital future will mean on a geoeconomic level.

While China’s military power is expanding rapidly, its digital domination is also coming into the spotlight.

Amid growing tension with the U.S., the race for both sides to make their technology the global standard will intensify, along with the decoupling of 5G and semiconductors.

But there won’t necessarily be one clear winner.

Observers point out that U.S. President-elect Joe Biden may utilize digital technology to solve common issues for humankind, including in carbon neutrality, climate change and infectious disease measures.

But there is no guarantee that countries will cooperate with other nations’ leaders and not vie over whose digital standard should be adopted.

And there may be more pressing problems common to all humankind.

In his book “Homo Deus,” historian Yuval Noah Harari points out the danger that a huge amount of jobs will disappear in various economic levels if AI and the digital revolution dominate the world economy.

There are also large differences in how each country responds to issues such as the winner-takes-all nature of the digital economy, or a concentration of business among the most powerful players in the market, and how personal data will be protected and used.

There is no doubt that the difference in those responses will form the basis for the societies of each country in the coming years.

How will China deal with these issues? The Ant incident offers a hint on how Beijing will respond from here on.

Tatsuhito Tokuchi is a senior fellow at Asia Pacific Initiative, an independent think tank based in Tokyo. API Geoeconomic Briefing, provided by API, is a series that looks into geopolitical and economic trends in the post-COVID-19 world, with a particular focus on technology and innovation, global supply chains, international rule-making and climate change.

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