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China's leaders are considering new oversight and rules aimed at curbing monopolistic behavior in the online and mobile payment sector. (Keystone)
Equities Navigating China's new antitrust rules on electronic payments
22 January 2021, 4:31 pm CET, written by UBS Editorial Team
China’s central banks released draft antitrust rules targeting its fast-growing non-bank payment industry. While concerns over regulatory headwinds and questions over business models may hit near-term sentiment, we see several reasons to remain positive on China’s digital economy names.
The People’s Bank of China (PBoC) late Wednesday offered details on its proposed rules, including provisions for halting monopolistic behavior or even breaking up non-bank institutions that “severely hinder” a healthy market. The rules will define a non-bank firm a monopoly if it captures more than 50% of electronic payments nationwide. Those which account for a third of market share will face PBoC talks over their dominance. The application of these definitions will depend on how the central bank measures payments. In a report last year, the PBoC estimated Alipay’s payment market share accounted for nearly 45%. “Sentiment-wise, this is obviously a headwind, and it comes on the back of the Ant IPO cancellation and tighter rules for mega-cap tech practices within China’s non-bank financial sector,” says CIO analyst Hyde Chen. “On the other hand, incremental payment regulations are widely anticipated, and we think the real impact will depend on how enforcement is approached. We don’t get the sense they are trying to tear apart the giants or force them to share everything they’ve built." Hong Kong-listed shares in Alibaba fell 2.6% on Thursday, following an 8.2% rise the day prior. Shares of Tencent rose 0.4%, versus a 0.1% decline in the broader Hang Seng index. As part of the draft rules, the PBoC has proposed it takes on regulatory responsibility for non-bank payment firms, including regulating systemic risks. Some 233 such non-bank payment licenses have been issued in China, though just two players —Alipay and WeChat Pay—command the vast majority of the online payment market. “Late last year when we turned positive on China tech names again within global tech, the view was that we had reached peak regulatory risk in terms of the share price,” says CIO analyst Sundeep Gantori. “This shift in posture might slightly For UBS marketing purposes
challenge those expectations, especially if we see additional actions governing marketplace access or the cross-selling of products and services.”
“Still, a lot is already priced in, and we are skeptical that regulatory action alone can shift users or institutions away from the dominant platforms,” says Gantori. “Once they reach a certain size, users, businesses and infrastructure are very sticky.”
We remain positive on China digital economy names, including those with fintech exposure or fast-growing platform companies set to benefit from 5G connectivity.
We recently upgraded China equities to most preferred within our Asia portfolios, and anticipate mid-teens upside for Chinese stocks in 2021 as the cyclical recovery continue.
Read the report Why we’re moving China back to most preferred 15 January 2021.
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