Chinese authorities are considering requiring Tencent Holdings to include WeChat Pay in a newly created financial holding company, part of an overhaul that may necessitate a new licence for the ubiquitous mobile payments service, according to people familiar with the matter.
The potential move would present a fresh hurdle for Tencent, which along with other Internet firms was told in 2021 to cordon off financial services from its main business. Similar to requirements imposed on Jack Ma’s Ant Group, Tencent needs to fold its banking, securities, insurance and credit-scoring services into a financial holding company that can be regulated like a traditional bank, the people said.
Regulators are now weighing whether WeChat Pay should be included in that holding company and operate separately from the main social media arm, the people said, asking not to be named discussing private deliberations.
While investors have long anticipated the financial services overhaul, details of how that impacts WeChat Pay — which handles billions of dollars daily but is a transactional platform rather than a lender — have until now proven elusive.
Including WeChat Pay in the financial entity adds a new layer of uncertainty to the restructuring because it’s an integral feature of the WeChat super-app used by a billion-plus people, relying on backend support from different divisions. Any move that reduces the convenience of the service in Tencent’s mobile offerings risks chipping away at the one-stop-shop appeal that turned the Chinese firm into one of the world’s most valuable companies.
It might also revive investor angst about Beijing’s crackdown on technology companies. Speculation that the nearly two-year campaign is nearing an end has helped stocks including Tencent rebound from multi-year lows this week.
Direct scrutiny
Including WeChat Pay in the financial holding company would subject the service — and the vast reams of user data it generates daily — to the direct scrutiny of new regulatory bodies like the central bank, with uncertain ramifications. Ant’s estimated valuation has dropped to as low as US$63-billion from more than $300-billion at its peak, in part because of the stricter regulations that come with being a financial holding company.
The mechanics of ring-fencing Tencent’s financial business — including interoperability between different platforms — still need to be ironed out and arrangements could change, the people said. One certainty is that a financial holding company would mean additional capital requirements and tighter regulatory scrutiny. The Wall Street Journal reported this week that Tencent faces a record fine after Chinese authorities found WeChat Pay had violated anti-money laundering rules.
Tencent is expected to maintain control of the new finance arm but one question is whether services accessed through WeChat must in future offer equal ease of access to Ant’s rival Alipay. Regulators considered Tencent’s current payments licence owned by its TenPay unit, the backend provider of wallet services on WeChat and QQ, as insufficient to cover WeChat Pay’s services, the people said.
The People’s Bank of China didn’t immediately respond to a request seeking comment. Tencent representatives declined to comment.
In April 2021, regulators summoned 13 firms including Tencent, Meituan and ByteDance to a meeting, requiring them to restructure their financial wings into holding companies and sever “improper links” between their existing payments services and financial products.
The requests on Tencent are similar to those imposed on Ant, which regulators said earlier this month has yet to complete its own overhaul. Executives have said such a move should have minimal impact on operations. Tencent management including chief strategy officer James Mitchell stressed during the company’s May earnings call that their bread-and-butter in the finance business was payments, which has lower risks.
But WeChat Pay is at the heart of the social media giant’s businesses, handling an estimated 40% of China’s mobile payments as of 2021, second only to Alipay. Tencent’s complex web of internal connections could complicate its separation from the rest of the company.
Tencent’s fintech and business division — which includes cloud computing — is its fastest growth engine, contributing roughly 30% of its total sales, the biggest revenue source after gaming. Yet the services are supervised by different business groups — unlike Ant, which consolidates all of its fintech operations into a single entity.
For instance, the payments business straddles two units including WeChat, the instant messaging app, and the fintech unit that provides the back-end infrastructure under the leadership of the corporate development group.
More than a year after the Chinese government snuffed out the biggest initial public offering in history by Ant, Beijing’s crackdown has snowballed into an assault on every corner of China’s technosphere. Officials have handed out billions of dollars in antitrust fines to end the domination of a few heavyweights as President Xi Jinping pushes for more “common prosperity”.
‘Rectification’
Yet on Wednesday, Chinese officials led by vice Premier Liu He vowed to stabilise financial markets, promising to ease a regulatory crackdown, support property and technology companies and stimulate the economy. Liu stipulated that the “rectification” of major tech platforms should end “as soon as possible”.
The series of statements spurred a jaw-dropping 32% rebound in the Hang Seng Tech Index over two days, with a gauge of China shares listed in Hong Kong soaring by the most since the financial crisis.
Still, it’s unclear whether the regulatory tightening is peaking or ending, as the government continues to implement a so-called “red light, green light” mechanism. And Tencent — the world’s biggest publisher of mobile games — is dealing with other regulatory hurdles.
China’s government has imposed strict curbs on gaming time for minors, and hasn’t approved a single new title — for Tencent or any other developer — in months. And last year, the country’s technology overseer warned Internet firms to stop blocking rival services, prompting WeChat to start allowing external links to apps run by the likes of Alibaba Group and ByteDance. That process remains in the works. — (c) 2022 Bloomberg LP
