Foreign media fail to understand Chinese fintech regulators

Nan Li is Associate Professor of Finance at the Antai College of Economics & Management, Shanghai Jiao Tong University. John D. Van Fleet supports industry relations for Antai College.

It seems not a month goes by without an English-speaking media outlet making room for even more misleading media coverage of Jack Ma’s Ant Group and the Chinese financial industry in general.

Last month’s eruption involved so-called new and nefarious regulatory actions undermining Ant’s hard-earned entrepreneurial successes and innovations. If only they had waited a week, or simply done a little more research, these media organizations might have avoided embarrassing themselves.

After Ant recently announced that its now separate Huabei loan arm, with permission from borrowers, would report individual credit data such as loan volume and repayment history to the People’s Bank of China, the company has confirmed that personal expenditure data would not be communicated.

Better late than never. For over a year now, Chinese regulators have been asking Ant, and other online microlenders to report such data, but Ant has long tried to resist his responsibilities, as the now infamous speech shows. de Ma in Shanghai attacking financial regulators as having a “pawnshop mentality”.

Since then, Chinese regulators have been increasingly clear on the path to take over Ant: to separate consumer lending and payments business, and follow appropriate financial sector regulations aimed at reducing conflicts of interest and moral hazard.

Around the world, credit reference bureaus perform the critical function of aggregating credit data. In some countries, these organizations are controlled by the state. In others, they are managed privately, such as the US data analysis company FICO. Nowhere is the essential component of consumer data protection left to unattached private sector lenders, as Ant had been before.

The all-too-regular epidemics of misleading reporting about Ant and China’s consumer credit industry are generally based on a series of myths, in addition to the prejudices that “everything that happens in China today is news” or is. a politically motivated attack.

One of those myths is that Ant’s credit scoring model and related data is valuable intellectual property that Beijing is eager to get their hands on.

This alleged government attack is launched as a pernicious blow against free enterprise, part of an existential battle between the titans of noble industry, the captains of creative destruction and, once again, the bureaucrats who harm the economy. .

But Ant’s credit scoring model, developed by non-financial technicians with little experience in risk management, was primarily based on consumer spending behavior. In itself, this data is far from worthless. If it were a stand-alone entity, it would be a loss making company.

A sign with a QR code for payment via Alipay sits among produce at a farmer’s market in Beijing in October 2020: Ant’s credit scoring model was based on consumer spending behavior. © PA

Putting an end to the media screeching of Chicken Little, Ant’s recent announcements confirm that the central bank has no interest in obtaining personal spending data collected by Ant from Alipay, Alibaba Group’s payment platform Holding.

Additionally, in a multi-year regulatory review that culminated in the introduction of the new Personal Data Protection Act in August, personal data, including spending and credit history, is protected. It is now illegal in China for any other party to read or use data without someone’s specific permission, let alone exploit the data for profit. Again, this fits well with global practice and common sense.

Large Chinese commercial banks have long played their role in developing far better credit scoring models than Ant ever could or will ever do since the banking reforms of the 2000s.

The China Credit Reference Center was established in 2006 to “establish, operate and maintain the National Centralized Commercial and Consumer Credit Assessment System”. For years, Chinese commercial lenders have relied in part on data from CRC – the largest such pool in the world – to measure and manage credit risk.

Another myth is that the recent regulatory announcements are a net loss for investors.

While this may be true for investors who have taken advantage of Ant’s predatory lending practices, investors in companies committed to building long-term value should be happy with recent regulatory updates. . And many are, judging by subsequent statements from some of the world’s most renowned investors.

Around the world, there is a heated debate, even among companies in the financial sector, about the right way to grow fintech. What no one doubts is the need to regulate financial institutions – including fintechs – to keep the financial system strong and secure.

After Huawei Technologies’ Meng Wanzhou’s post last month, the US Department of Justice issued a statement claiming that “financial institutions are our first line of defense in maintaining the safety and security of the US financial system.”

Therefore, we suggest that regulatory “interference” in Ant’s business model is not an overly malicious government manifestation. Not only is this to China’s advantage, but it may be a model for other economies to follow.

Either way, companies as a whole and the savvy investors within them would do well, including in their long-term returns on investment, to assess regulatory measures based on their specific value – or lack thereof. – and not false media stories. International news agencies could strengthen their credibility by avoiding the hype from interested actors.

About Myra R.

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