president xi jinping

China’s Central Bank Official Urges the Acceleration of Digitization of the Chinese Economy with Blockchain

China’s central bank, the People’s Bank of China (PBoC) Financial Technology Committee held its first meeting of the year this week, after months of delay due to the coronavirus pandemic.

Fan Yifei, the PBoC’s deputy governor echoed President Xi Jinping’s call for the acceleration of the country’s blockchain development adoption. The president pointed out that it is necessary to strengthen fundamental research of blockchain technology and enhance innovation, enabling China to take a leading position in the blockchain field.

The bank’s deputy governor met with the central bank’s officials as well as the heads of their affiliated financial institutions. Fan emphasized the importance of blockchain and financial technology (FinTech) industries and wanted to ensure China’s adoption plan would be laid out and implemented by 2021 to be in line with the deadline they have set out.

As Sina reported, the main takeaway from the meeting was said, “It’s necessary to strengthen the application of regulatory science and technology, actively use big data, artificial intelligence (AI), cloud computing, blockchain, and other technologies to strengthen the construction of digital supervision capabilities.”

New policies were also discussed along with an overview of scientific studies to encourage the development plan, as Fan further stressed the urgency for accelerating the digitization of the Chinese economy.

First-ever blockchain zone in China

The first provincial blockchain zone has been established in China, in the central Chinese province of Hunan. The “Wanbao” blockchain zone is located in the city of Loudi, marking the first blockchain zone in China.

China’s 2019 blockchain zone development report placed the city of Loudi at 17th among domestic blockchain zones. With a total of 788 blockchain enterprises established in Hunan, a few of the industry-leading enterprises include Shareslink, Hyperchain, Incite Data, and Shenzhen Defang Technology.

The province currently plans to build three major blockchain zones, including blockchain industrial parks in Wanbao district in Loudi, and other zones in Jingkai and Gaoxing in the city of Changsha in the Hunan province.

Blockchain and AI for cross-border financing

China is researching the application of blockchain technology and artificial intelligence in cross-border financing, with a focus on risk management.

Lu Lei, the deputy head of the State Administration of Foreign Exchange (SAFE) in China, said that there are plans to use blockchain and AI for cross-border financing after Facebook announced plans for its Libra stablecoin.

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China’s President Xi Jinping Killed Ant Group’s $37 Billion IPO After Jack Ma Criticism

China’s President Xi Jinping personally made the decision to stop the world’s largest-ever IPO after Ant Group’s founder and China’s second-richest man Jack Ma spoke out against the country’s innovation-stifling financial regulation and banking system.

Fintech giant Ant Group was expected to go public on Nov. 5, until founder Jack Ma provoked regulators in Beijing, prompting China’s President Xi Jinping to personally pull the plug on the record-breaking $37 billion initial public offering (IPO).

According to a report from the Wall Street Journal on Nov.13, citing Chinese officials close to the matter—following billionaire Jack Ma’s criticism of the regulatory watchdogs, President Xi ordered Chinese regulators to investigate and shut down Ant Group’s stock market flotation.

Ant Group founder Ma appears to have drawn the ire of Beijing due to a speech he delivered on Oct. 24, at the “Second Bund Financial Summit” organized by the China Financial Forty Forum (CF40) and member institutions.

Speaking as the co-chair of the United Nations Digital Cooperation High-level Group, Ma told the summit in Shanghai, that China’s regulation was stifling innovation and was in need of serious reform. The fintech giant billionaire also praised digital currency and stated that the technology would redefine money in the same way that Apple has redefined phones and will likely be the core of the world’s future financial system.

Ant Group founder Jack Ma and the firm’s top executives were subsequently called into a meeting with People’s Bank of China (PBoC) and three financial regulators on Nov.2, the same day as China published new draft rules for online micro-lending.

At the time the CSRC would not give details of the discussion but the meeting was attended by the People’s Bank of China (PBoC), China Securities Regulatory Commission (CSRC), China Banking and Insurance Regulatory Commission and foreign exchange regulators, who met with Ant Group’s controlling shareholder Jack Ma, Ant’s executive Eric Jin and its Chief Executive Simon Hu.

The following day on Nov.3, the Shanghai Stock Exchange in China published an announcement titled, “Decision on postponing the listing of Ant Technology Group Co., Ltd. on the Sci-Tech innovation board.” The Ant Group was expected to be listed on Nov. 5, 2020 in what was destined to be the biggest IPO the world had ever seen at $37 billion.

According to Reuters, immediately following the Ant Group founder’s speech China’s regulators began to compile data on how Ant’s digital finance business model was creating debt with poor and young people. A report on public sentiment about Jack Ma’s speech was also compiled by the State Council and submitted it to senior leaders including President Xi Jinping himself—who then personally made the decision to axe Ant Group’s IPO.

Jack Ma Pays Price: 2.1 Trillion Yuan Ant IPO for 21 Minutes Speech

According to the WSJ, China’s President Xi Jinping personally stopped Ant group’s record-breaking IPO allegedly angry with Jack Ma’s speech at a Shanghai Summit, where China’s second richest man openly criticized Beijing’s innovation stifling financial regulation.

On Oct. 24, at the “Second Bund Financial Summit” organized by CF40, Jack Ma, in the title of co-chair of the United Nations Digital Cooperation, delivered a scathing critique of China’s regulation in a 21-minute speech that would ultimately cost Ant Group 2.1 trillion yuan when the news reached President Xi.

During his speech, Ma was openly critical of the Basel Accords and China’s financial system and regulation. He said:

“Basel Accords are more like a club for the elderly. What it wants to solve is the problem of the aging financial system that has been in operation for decades, and the problem of system complexity. But China’s problem is just the opposite. China has no financial systemic risk but is at risk of stifling innovation in the financial ecosystem.”

What happened after Jack Ma’s speech?

Jack Ma’s speech stirred hot discussion online, and the news received mixed-responses from the public.

On Nov. 2, a week following Jack Ma’s critical speech, the Ant Group founder and the firm’s top executives were summoned to meet with China’s central bank and three financial regulators.

On Nov 3, China Banking and Insurance Regulatory Commission and the Chinese central bank announced “Interim Measures for the Administration of Online Micro-Lending (Draft for Comment)”. There are more regulations in the measures, including the ruling “the proportion of the capital contribution of a small loan company operating online small loan business shall not be less than 30%”, which constrains leverage ratio.

Later that day, on Nov 3, Jack Ma’s Ant Group IPO was suspended by authorities. In what was projected to be the largest IPO ever in the world, Ant’s IPO would have raised $34.5 billion with over $3 Trillion USD funds subscribed and the market cap would be 2.1 Trillion Yuan ($317 billion). The IPO would also have allowed Alibaba Founder Jack Ma to resume his previous title of China’s richest, which he lost to Nongfu Spring founder Zhong Shanshan in September.

Another factor that drew criticism of China’s financial watchdog’s is Ant Group’s Price-to-Earnings (P/E) ratio which is astronomically high at around 154. For comparison, China Construction Bank (CCB) one of the ‘Big Four’ China banks and the second-largest bank in the world has a P/E ratio under 6.

What Ant Group really does?

Ant Group is an affiliate company of Alibaba Group and owner of Alipay, the largest online payment platform in China. But Ant Group’s largest single source of revenue comes from its lending service rather than its payment services. It is more like a finance company instead of a technology company.

The Advantage of Ant Group is that it has multidimensional user data. Leveraging a combination of technologies mainly blockchain, big data and AI, the fintech giant can calculate the credit score of every user, then lend them money based on the score. As Ant Group has more accurate user profiles, in general, it has lower bad debt.

As Ant Group is not a bank, it doesn’t need to follow strict regulations imposed on banks, meaning that Ant Group can, in theory, lend unlimited money to users. Ant Group argues that its technologies can prevent credit risks typically prevented by capital reserve requirements.

Huang Qifan, the Mayor of China’s directly-controlled municipality Chongqing, once said “Ant Group has lent more than 300 billion RMB. Yet they only have around 3 billion capital. It’s ridiculous, that is one-hundred-to-one (100:1) leverage.”

The Ant group has taken advantage of non-bank lending services. According to the Chinese Central bank, the average deposit reserve requirement ratio of financial institutions is 9.4%. But Ant Group’s reserve is below 1%. This is very risky and seriously undermine financial stability.

Credit, Money, and Basel Accords

Basel Accords are the practices and rules on banking regulations, especially on credit and reserve. The accords were formed to ensure that financial institutions have enough capital on account to absorb unexpected losses.

Under Basel Accord I, a bank that has international businesses is required to have a risk weight of 8%. Under Basel III, the minimum capital adequacy ratio that banks must maintain is 8%, in other words, banks need to have a minimum amount of common equity and a minimum liquidity ratio.

Actually, financial credit is the most common method to “create” money and put the money into the market. The money is created purely on credit. In fact, credit is not trustworthy in history. Even America has experienced a few national defaults. Although Ant Group has many accurate user profiles, it is the data of the past. One typical case is that many high-quality users bankrupted due to the bad economy caused by Covid-19.

The only guaranteed method to the problems caused by bad debt is enough reserve. Ant Group has highlighted technology innovation in finance. But innovation doesn’t mean taking on high risk and bypass financial regulations.