Tech

China Considers Major Reorganization of Tencent

Chinese authorities According to those familiar with the matter, Tencent Holdings is considering requiring its newly formed financial holding company to include WeChat Pay, as part of an overhaul that may require new licenses for its ubiquitous mobile payment service.

The potential move would be a new hurdle for Tencent, which, along with other internet companies, has been instructed to shut down financial services from key businesses in 2021. Similar to the requirements imposed on Jack Ma’s Ant Group, people said Tencent should transform its banking, securities, insurance and credit rating services into a financial holding company that can be regulated like a traditional bank.

Regulators are currently reviewing whether WeChat Pay should be included in its holding company and operate separately from the main social media sector, people said.

Investors have long anticipated a financial services reshuffle, but details about how this will affect WeChat Pay, a trading platform that processes billions of dollars every day, have not been substantiated so far.

The inclusion of WeChat Pay by financial institutions adds another layer of uncertainty to the restructuring. This is because it relies on backend support from various departments as it is an essential feature of the WeChat super app, used by billions of people. Any action that reduces the convenience of services in Tencent’s mobile products risks undermining the attractiveness of one-stop shopping that has made the Chinese company one of the world’s most valuable companies.

It could also rekindle investor anxiety about Beijing’s crackdown on tech companies. Speculation that a nearly two-year campaign is nearing its end has helped stocks, including Tencent, rebound from multi-year lows this week.

direct investigation

The inclusion of WeChat Pay by financial holding companies will put the services and the vast amount of user data generated every day subject to direct scrutiny by new regulators such as central banks, with uncertain results. Ant’s estimated value has dropped from more than $300 billion to $63 billion at its peak, in part due to tighter regulations along with becoming a financial holding company.

People said that the boundaries of Tencent’s financial business, including interoperability between different platforms, must be broken down, and coordination may change. One thing is certain: financial holding companies mean additional capital requirements and tighter regulatory scrutiny. The Wall Street Journal reported this week that Tencent is facing a record fine after Chinese authorities discovered WeChat Pay was violating anti-money laundering rules.

Tencent is expected to retain control of the new financial sector, but there is one question about whether services accessed via WeChat should provide the same accessibility to Ant’s rival Alipay in the future. Regulators have said that Tencent’s current payment license, owned by the TenPay division, a backend provider of wallet services on WeChat and QQ, is insufficient to cover WeChat Pay’s services.

The People’s Bank of China did not immediately respond to a request for comment. A Tencent official declined to comment.

In April 2021, regulators convened 13 companies, including Tencent, Meituan, and ByteDance, to a meeting, calling for the financial sector to be reorganized as a holding company and to break the “inappropriate link” between traditional payment services and financial products.

Requests to Tencent are similar to requests made to Ant. Ant said earlier this month that regulators have not yet completed their own checks. Management said the impact of these measures on operations should be minimal. Tencent executives, including chief strategy officer James Mitchell, emphasized in the company’s May earnings announcement that their fundamentals in the financial business are low-risk payments.

However, WeChat Pay is at the heart of the social media giant’s business, processing about 40% of China’s mobile payments as of 2021, second only to Alipay. Tencent’s complex interconnections can complicate the separation from the rest of the company.

Tencent’s fintech and business segments, including cloud computing, are the fastest-growing engines, accounting for approximately 30% of total revenue, the second largest revenue stream after gaming. However, the service is overseen by various business groups, unlike Ant, which consolidates all fintech operations into a single entity.

For example, the payments business spans two segments: the instant messaging app WeChat and the Fintech sector, which provides backend infrastructure led by an enterprise development group.

More than a year after the Chinese government halted Ant’s largest IPO in history, Beijing’s crackdown has snowballed, attacking every nook and cranny of China’s tech sphere. As President Xi Jinping pursues more “common prosperity”, officials have imposed billions of dollars in antitrust fines to end the domination of a handful of giants.

‘rectification’

But on Wednesday, Chinese officials, led by Deputy Prime Minister Liu He, promised to stabilize financial markets, promising to ease regulatory crackdowns, support real estate and tech companies and revitalize the economy. Liu stipulated that “fixes” of major technology platforms should be done “as soon as possible”.

A series of statements spurred the Hang Seng Tech index to rebound 32% over two days, and the gauge of Hong Kong-listed Chinese stocks soared the most since the financial crisis.

However, it is unclear whether the tightening of regulations will peak or end as the government continues to implement the so-called ‘red light, green light’ mechanism. And Tencent, the world’s largest publisher of mobile games, is dealing with other regulatory hurdles.

The Chinese government has severely restricted the amount of time played by minors, and for months hasn’t approved a single new title for Tencent or any other developer. And last year, the country’s tech supervisor warned internet companies to stop blocking competing services, and WeChat started allowing external links to apps like Alibaba Group and ByteDance. That process is still in the works. — (c) 2022 Bloomberg LP

China Considers Major Reorganization of Tencent

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