PBOC takes aim at digital payments duopoly - Capital Economics
China Economics

PBOC takes aim at digital payments duopoly

China Economics Weekly
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The People’s Bank this week issued draft guidelines that would force China’s mobile payments giants to cede ground to their rivals or face being broken up. The argument that this is needed to foster market competition is weak. Instead, the goal appears to be to ensure that individual private firms don’t dominate a key part of the economy, even if the cost is lower economic productivity overall.

Anti-trust guidelines target Ant and Tencent

The PBOC issued draft guidelines on Wednesday that set explicit market share ceilings for non-bank payment providers, offering greater clarity about what the government’s anti-trust push against China’s tech giants may mean in practice. These new market share limits are shown in Table 1, along with the consequences if the thresholds are exceeded. Since the central bank is not directly responsible for anti-trust regulation, it will recommend follow-up actions to the State Council. Aside from the standard recommendations listed below, the PBOC has said it will push for firms to be broken up if they threaten the healthy development of the payment service market. Firms will be given a one-year grace period to comply with the rules.

Table 1: New PBOC Guidelines on Non-bank Payment Providers

Market

Market Share Limits

Response if Exceeded

Non-bank payment service

One firm: 33%

Two firms: 50%

Three firms: 60%

Recommend State Council issues a warning

Digital payments (incl. by banks)

One firm: 50%

Two firms: 67%

Three firms: 75%

Recommend State Council launches an anti-trust probe

Sources: PBOC, Capital Economics

The guidelines do not specify exactly how the PBOC will calculate market shares. But it is clear that Alipay and WeChat Pay, which are responsible for nearly 95% of mobile payments, exceed the thresholds. They may have to cede some ground to smaller rivals or face being broken up. New entrants may be tempted to throw their hats into the ring. Just this week Douyin, the Chinese version of TikTok, launched an e-wallet and payment service.

The tech giants’ critics have a point about some of their practices, such as forcing merchants to stick to one platform. But the PBOC’s approach looks heavy-handed. Economic theory suggests that, with the right regulatory framework, even duopolies can produce outcomes close to prefect competition. In industries like payments, network effects and increasing returns to scale make it more efficient to have a small number of competing large players. The leadership knows this: it has used exactly this argument to justify consolidation of large state firms into national champions over recent years – even in heavy industry where network effects are much weaker than in payments.

The campaign to cut down the market share of Alipay and WeChat Pay could therefore have broad ramifications for the economy. These firms and their parent companies have been important drivers of productivity gains. The detailed GDP breakdown published this week showed that the IT sector grew around 20% y/y last quarter.

The upshot is that the argument that these new anti-trust guidelines are needed to foster market competition is weak. Instead, the goal appears to be to reassert control. China’s leadership is willing to risk dampening innovation in the tech sector in order to prevent individual private firms from having too much sway over key parts of the economy.

A further blow to New Year festivities

Officials are still struggling to contain China’s worst virus outbreak in almost a year. They tightened travel rules further this week, with home quarantine and regular testing now required for rural migrants that return home during the Lunar New Year holiday. Alongside incentives for workers to stay put, the restrictions will dent holiday travel, which the Ministry of Transport expects to be 40% below 2019 levels. In purely macro terms though, the impact may be much smaller than most expect. Our view is still that the hit to consumption and services activity should be mostly offset by factories being able to put more staff to work over the holiday than usual.

The week ahead

The data release calendar on the mainland is quiet for the coming week. In Hong Kong, we think GDP probably continued its recovery in Q4 despite a fourth wave of infections.

Data Previews

Hong Kong GDP (Q4, Adv.) Fri. 29th Jan.

Forecasts

Time (China)

Previous

Consensus

Capital Economics

GDP q/q (y/y)

16.30

+2.8% (-3.5%)

(-2.6%)

+2.0% (-1.0%)

Economy continued to recover in Q4 despite fourth wave

Hong Kong’s economy expanded in q/q terms for the first time in over a year in Q3 following back-to-back blows from protests and COVID-19. We think the city continued to recover in Q4, but a fourth wave of infections at the end of November may have caused some loss of momentum.

Retail sales data suggest that household consumption, which makes up about two-thirds of GDP, was picking up in October and November. But previous experiences suggest that the fourth wave probably weighed down on the economy at the end of the quarter. (See Chart 1.)

Other parts of the economy probably performed better. Hong Kong’s export growth continued to pick up in October and November as renewed lockdowns abroad ensured that foreign demand for goods remained strong. Given that trade logistics make up one-fifth of economic activity, this would be a welcome boost to growth. Economic activity on the mainland – which many businesses in Hong Kong are highly reliant on – accelerated further, which should have helped investment. Meanwhile, the government’s large stimulus fiscal package should have boosted public spending.

Chart 1: CE Hong Kong COVID Mobility Tracker
(%-change from pre-crisis baseline)

Sources: Google, Apple, Capital Economics

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (China)

Previous*

Median*

CE Forecasts*

January

Tue 26th

HK

Exports (Dec.)

(16.30)

(+5.6%)

(+3.1%)

HK

Imports (Dec.)

(16.30)

(+5.1%)

(+2.5%)

HK

Trade Balance (Dec., HKD)

(16.30)

-25.6bn

-31.0bn

Wed 27th

Chn

Profits of Large Industrial Firms (Dec.)

(09.30)

(+15.5%)

Fri 29th

HK

GDP (Q4, Adv., q/q(y/y))

(16.30)

+2.8%(-3.5%)

(-2.6%)

+2.0% (-1.0%)

Also expected during this period:

TBC

Chn

CBRC Data on Assets and Liabilities of Fin. Inst. (Dec.)

TBC

Chn

Trade – Detailed Breakdown (Dec.)

Selected future data releases and events:

January

Sun 31st

Chn

Official PMIs (Jan.)

February

Mon 1st

Chn

Caixin Manufacturing PMI (Jan.)

Tue 2nd

HK

Retail Sales (Dec.)

Wed 3rd

Chn

Caixin Services PMI (Jan.)

Also expected during this period:

TBC

Chn

Current Account Balance – Preliminary (Feb.)

Main Economic & Market Forecasts

%q/q annualised (%y/y), unless stated

Latest

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

2020e

2021f

2022f

Official GDP

(+6.5)*

(+21.0)

(+9.0)

(+7.0)

(+5.5)

(+5.0)

(+2.3)

(+10.0)

(+4.5)

GDP (CE CAP-derived estimates)

(+7.6)*

(+31.0)

(+10.0)

(+5.0)

(+2.5)

(+3.0)

(+1.0)

(+10.0)

(+3.5)

Consumer Prices

(+0.2)**

(+0.9)

(+1.8)

(+1.5)

(+1.4)

(+1.4)

(+2.5)

(+1.5)

(+1.5)

Producer Prices

(-0.4)**

(+1.0)

(+2.5)

(+2.0)

(+1.5)

(+1.3)

(-1.8)

(+2.0)

(+1.0)

Broad Credit (AFRE)

(+13.1)**

(+12.0)

(+11.0)

(+10.0)

(+9.0)

(+8.0)

(+13.3)

(+9.0)

(+7.5)

Exports (US$)

(+18.1)**

(+27.0)

(+14.0)

(+2.0)

(+3.0)

(-2.0)

(+3.6)

(+10.0)

(+1.5)

Imports (US$)

(+6.5)**

(+17.5)

(+22.5)

(+12.5)

(+8.0)

(+7.0)

(-1.1)

(+15.0)

(+6.0)

RMB/$

6.47

6.40

6.30

6.20

6.20

6.20

6.54

6.20

6.20

7-day PBOC reverse repo %

2.20

2.30

2.40

2.50

2.50

2.50

2.20

2.50

2.50

1-year Loan Prime Rate (LPR) %

3.85

3.95

4.05

4.15

4.15

4.15

3.85

4.15

4.15

1-year MLF Rate %

2.95

3.05

3.15

3.25

3.25

3.25

2.95

3.25

3.25

10-year Government Bond Yield %

3.15

3.30

3.20

3.00

2.80

2.70

3.20

2.80

2.60

RRR (major banks) %

12.5

12.5

12.5

12.5

12.5

12.5

12.5

12.5

12.0

CSI 300 Index

5,565

5,550

5,600

5,650

5,700

5,825

5,211

5,700

6,200

Hong Kong GDP

(-3.4)***

(+7.0)

(+9.5)

(+8.0)

(+7.0)

(+5.5)

(-5.5)

(+8.0)

(+4.0)

Hang Seng Index

29,928

30,000

30,425

30,850

31,250

32,175

27,231

31,250

35,000

Sources: Bloomberg, CEIC, Capital Economics *Q4; **Dec.; *** Q3; End of period


Julian Evans-Pritchard, Senior China Economist, julian.evans-pritchard@capitaleconomics.com
Sheana Yue, Assistant Economist, sheana.yue@capitaleconomics.com