How is China’s Central Bank Challenging Alibaba and Tencent?

Here’s how Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988) and Tencent Holdings Ltd (SEHK: 700) are being challenged in the fintech space. – Mobile payment stocks

If banks are doing “God’s work”, as Lloyd Blankfein, the former CEO of Goldman Sachs, has put it, then the tech giants in China are doing the banks’ work.

With the popularity of mobile payments in China, the Chinese tech giants, led by Alibaba Group Holding Ltd (NYSE: BABA) (SEHK: 9988) and Tencent Holdings Ltd (SEHK: 700), have disrupted the whole banking sector.

With their mobile wallets, one now can easily invest in money market products (similar to putting your money into saving deposits), buy insurance products (similar to banks’ bancassurance distribution model) and other fund products (similar to buying wealth management products in bank branches).

In this article, I’ll take a look at the highly secretive digital currency trial launched by the Chinese central bank, the People’s Bank of China (PBoC), in recent months.

It is meant to rein in the power of tech giants so here’s what investors should know.

Digital Currency Electronic Payment

Since 2014, the PBoC has already been working on this secretive project known as Digital Currency Electronic Payment (DCEP).

The Chinese government has accelerated the development of the project in 2019 after Facebook Inc (NASDAQ: FB) announced plans to develop its own digital currency, Libra.

Earlier this year, the PBoC filed more than 80 patents related to this secretive government-backed digital currency.

It was reported in April that the digital currency began its trial in a few Chinese cities, including Shenzhen.

DiDi Chuxing, the ride-hailing equivalent of Uber in China, was also reported to have entered into a strategic partnership with the PBoC to accelerate the application of DCEP.

While it’s still too early to conclude the PBoC’s digital currency trial will definitely be a nationwide success, it’s quite certain to say that the competitive landscape in the Chinese mobile payments sector will be altered.

Impact on the tech giants

As many investors know, the Chinese market is mostly a policy-driven one.

The success of mobile payments spearheaded by the tech giants is, to a large extent, thanks to the government’s favourable policies to turn China into a cashless state.

But it’s also getting more uncomfortable with the tech giants’ increasing power. We are already seeing minor clashes between the government and the Chinese tech giants.

For example, it was reported recently that Alibaba and Tencent refused to share their users’ loan data with the credit scoring programme launched under the PBoC.

We can expect such clashes to continue, if not escalate, with the Chinese government stepping into the Fintech business.

On the other hand, given the partnership with DiDi and the tech-oriented consumer behaviour in China, it is likely that the future success of DCEP also hinges significantly on the support of the tech giants.

In my opinion, instead of fighting something that will inevitably come, Alibaba and Tencent will be better off helping it develop while it is still in its early stages.

By doing this, they can wield enough future bargaining power, and also potentially monetise from this development.

While many investors may shrug off the challenge of DCEP as distant, you don’t want a situation similar to 2018 where the Chinese government imposed restrictions on gaming licenses, which resulted in Tencent’s share price cratering.

After all, tail risk often arises when you don’t know what you don’t know.

Foolish conclusion

The risk of DCEP to Alibaba and Tencent will only become more and more significant.

What they choose to do with this in the coming year or two will be crucial as to how this will impact their businesses and share prices. The good thing is, they still have a choice now.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Alec Tseung owns shares of Tencent Holdings Ltd.

The Motley Fool Hong Kong Limited( 2020

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