Earlier reports of e-commerce leader Alibaba’s strong political ties appear to be overstated, following word that archrival Tencent has become the first of China’s major Internet firms to win a highly sought banking license. Both companies had been aggressively expanding into financial services over the past year, though each was reliant on partnerships with other companies that already had licenses to offer services in the highly regulated sector dominated by big state-run companies. But now Tencent will be able to offer many of those services on its own, following this ground-breaking award of a license from the nation’s banking regulator.
A series of western media reports last week had exposed Alibaba for having several well-connected investors, including the powerful sovereign wealth fund China Investment Corp (CIC) and a private equity fund linked to the grandson of former President Jiang Zemin. Alibaba fired back that those investors, who held relatively small stakes, had no managerial role at the company. Now perhaps that claim looks more credible, after this latest announcement about new banking licenses just awarded from the China Banking Regulatory Commission.
According to the latest reports, a Tencent-led group was one of three recipients of the new banking licenses, winning the award in a partnership with two local firms from its hometown of Shenzhen. Two other private groups also won licenses, one from the city of Wenzhou in eastern Zhejiang province and another from the northern port city of Tianjin.
Awarding of the licenses marks a major step in China’s recent effort to breathe some new life into China’s stodgy banking sector, which for years has been dominated by large state-run companies. To date, only two major privately backed banks exist nationwide, including Minsheng Bank in Shanghai and Ping An Bank, an arm of Ping An Insurance, which also happens to be in the special economic zone of Shenzhen.
Both Alibaba and Tencent, China’s two largest Internet companies, had been lobbying hard for the banking licenses since each embarked on aggressive forays into the financial services sector about a year ago. Media reported back in March that the pair were among ten groups picked as the first to receive private banking licensees by the regulator, as the first step in the ground-breaking move to open the sector to private competition. So this actual awarding of licenses means that Tencent will be one of the first to move ahead under that program.
The regulator’s decision to pick Tencent but not Alibaba in this first round of awards will come as a slightly setback to Alibaba, which had been the more aggressive about moving into financial services. Alibaba shook up the sector a year ago with the launch of its Yu’ebao product that competed with traditional bank savings accounts, and has rolled out a stream of other innovative products since then. The latest of those came just last week, when it announced a program aimed at lending to small and medium sized enterprises in partnership with six state-owned major banks.
Tencent’s receipt of a banking license first shows the company may be slightly better connected politically, which may dispel some of the talk about Alibaba’s own strong political ties. That said, I do expect we’ll probably see Alibaba receive a license in the not-too-distant future, almost certainly by the end of this year. Following this first batch of license awards, I expect we’ll see Tencent and its two partners move quickly to set up their bank, which may initially be restricted to doing business in its home city of Shenzhen. That should inject some much-needed life into the market, and I expect we could see these new private banks making a significant impact on the sector within the next two to five years.
Doug Young lives in Shanghai and writes opinion pieces about tech investment in China for Techonomy and at www.youngchinabiz.com. He is the author of a new book about the media in China, “The Party Line: How the Media Dictates Public Opinion in Modern China.”