China online payment groups face new rules

New regulations on online payment services could force leading Chinese internet companies including Tencent and Alibaba to restructure their shareholdings.

The People’s Bank of China issued regulations on Monday saying non-bank companies such as Alibaba, which operates the world’s largest online marketplace for trade between businesses and China’s largest retail e-commerce platform, would be allowed to provide third-party online payment services. The move establishes a legal basis for the first time for the country’s booming online business.

However, while the regulations allow third-party payment providers to apply for a licence with the central bank from September, the PBoC explicitly excluded companies with foreign capital from the new regulatory framework.

Alibaba owns Alipay, which dominates China’s online payment services with 70 per cent of the market. Yahoo of the US and Japan’s Softbank are among the largest shareholders in Alibaba’s unlisted parent.

“The business scope for foreign companies, the requirements for foreign investors in such businesses and the investment ratios [for] foreigners will be stipulated separately and reported to the State Council for approval,” the central bank said.

A senior executive at one internet company said on Tuesday that the move created a problem not just for companies such as PayPal, the world’s largest online payments company, “but for everyone with a shred of a foreign investment”.

“It means we will have to restructure our payment unit’s shareholding, and virtually all players that matter in the Chinese market will have to restructure their shareholding as well,” the executive said.

Industry insiders said they believed the central bank’s main motive for restricting foreign players in the industry would be to protect ChinaPay, the platform run by the country’s banks.

Chinese internet companies declined to comment amid concern that any critical remarks could jeopardise their chances of getting a licence. However, it is understood that Alibaba’s management is considering hiving Alipay off.

For Tencent, the implications are more far-reaching. The company is partly owned by Naspers, the South African media group, and listed in Hong Kong. Unlike Alipay in the Alibaba group, its payment business is not a separate legal entity. The new rules could require larger adjustments to Tencent’s shareholding structure, industry observers said.

99 bill, a third-party online payment provider partly owned by US venture capital funds and several Chinese online gaming companies listed on Nasdaq, could also be hit.

China’s online payment market reached Rmb208bn ($30.5bn) in the first quarter and is expected to grow as more of China’s 400m-plus internet users seek to pay for goods online.