China's nonbank payment companies face greater regulatory oversight on their initial public offerings and major expansion plans under the country's new rules, although analysts say clearly defined rules will enable better compliance.
Payment service providers must notify the People's Bank of China if they plan to go public, launch innovative payment products, establish new branches overseas or collaborate with overseas institutions, according to a statement by the central bank on July 23. Major data leaks will also need to be brought to the regulator's notice under the new rules, which will apply to some of China's biggest companies including WeChat Pay and Alipay, the payment platforms owned by the country's tech giants Tencent Holdings Ltd. and Alibaba Group Holding Ltd., respectively.
Chinese authorities aimed to tighten their grip on the country's fast-growing fintech companies in recent months with a series of new rules and measures, including stricter requirements on microlending that, in part, led to the suspension of what was set to be the world's biggest IPO by Ant Group Co. Ltd. They have also proposed regulations on data that may require fintech companies to go through a cybersecurity review before seeking to list outside of the country.
"It is clear that regulators are paying attention to regulations on nonbank payment entities since the suspension of Ant's IPO. However, there was no clear rule on what events needed to be reported and details of the reporting process. The most recent statement can help [regulators] oversee [these companies] more efficiently," said Li Min, a Shanghai-based partner at Hansheng Law Offices.
According to the People's Bank of China statement, companies will need to notify the central bank 30 days in advance about listing and overseas expansion-related events. Companies that plan to go public via a variable interest entity, or VIE, structure will also need to give a detailed explanation on the arrangement. A VIE structure, which involves an offshore holding company controlling onshore assets in regulated industries that cannot be legally owned by foreign investors or entities, is widely adopted by Chinese internet and e-commerce companies seeking to list overseas and get tax benefits by skirting around domestic investment restrictions.
"The emphasis is for the regulators, including the central bank and all the regional banking regulators, to have a consistent approach to the regulation of reportable events," said William Gee, a partner at consulting firm PricewaterhouseCoopers.
"Clearly defined criteria would also benefit institutions on their compliance efforts," Gee said, noting that in the past, regional regulators in China sometimes had requirements different from the central bank.
Still, the nation's sweeping clampdown on its technology sector and tighter rules for private education companies announced over the weekend have caused stocks of U.S.-listed Chinese companies to lower sharply. The Nasdaq Golden Dragon China Index, which tracks the biggest 98 Chinese companies listed in the U.S., has shed nearly 15% since Friday, taking the year-to-date loss to more than 27%.