Liu Dian: Will WeChat Pay and Alipay be the next victims of US sanctions?

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Liu Dian: Will WeChat Pay and Alipay be the next victims of US sanctions?

2020-10-12

Source: Time 24 Story   Published:2020-10-10



The Trump Administration is considering limiting the activity of Chinese payment services Alipay and WeChat Pay, media report. They emphasize that national security could be the reason for such restrictions.


As Bloomberg writes, the corresponding meeting was held at the White House on September 30. US officials noted that the expansion of Chinese payment services abroad poses risks to national security. And it is that the payment companies have the financial and personal data of the users. Washington maintains that this data can be used at any time by the Chinese authorities.


Bloomberg points to three possible scenarios. In the First, the president could issue an Executive Decree, similar to the one that established restrictions regarding WeChat Y TikTok. In the second, the Law of Protection of Digital Supply Chains of 2019 would be applied. third, sanctions would be imposed against Chinese companies under the the SDN blacklist.


All these options except the first involve initiating lengthy bureaucratic procedures, and there is not much time left to complete them before the elections, Bloomberg warns. The Executive Decree, as the experience of WeChat and TikTok shows, could be challenged in court, as has happened in the case of these Chinese social networks, against which the US sanctions did not come into force.


The US authorities maintain that, in the case of WeChat and TikTok, the court is based on the First Amendment of the US Constitution, which protects freedom of expression. But in the case of financial companies it would not be possible. Therefore, under these conditions, the Trump Administration is likely to issue a new Executive Decree, Bloomberg notes. But even if this decree takes effect, it will not be seen as a nuclear financial blow to Chinese companies. Alipay and WeChat Pay occupy a virtually exclusive position in China’s domestic mobile payments market.


Last year four out of every five transactions in this country were carried out through one of the two systems. Its volume exceeded 40 trillion dollars. However, outside of China these systems did not even reach 5% of online payments. Therefore, banning Alipay or WeChat Pay in the US would hardly be noticeable to these companies.


In the case of blacklisting of entities, any transaction through Chinese companies could prove toxic to their partners. Both Alipay and WeChat Pay would struggle with dollar calculations. This means that Chinese financial giants would become purely internal mechanisms for yuan payments at best.


This is an unlikely scenario, but it can’t be completely ruled out, think the experts at Bloomberg. The main goal of the US is contain the international expansion of Chinese financial companies, as well as the internationalization of the yuan, according Liu Dian, a researcher at the Chongyang Institute of Financial Studies of the People’s University of China.


“THE MAIN GOAL THAT THE US IS PURSUING WITH THE SUPPRESSION OF ALIBABA AND TENCENT IS TO THWART THE INTERNATIONAL EXPANSION OF CHINESE PAYMENT PLATFORMS,” SAYS THE ANALYST.


Liu Dian notes that these payment systems are expanding rapidly. Chinese payment services can be considered a tool to directly support the internationalization of the yuan, opines. The financial and personal information of users, even abroad, is available for Alipay and WeChat Pay, which, according to the US, threatens their national security.


Chinese payment services are generally aimed at Chinese tourists traveling abroad. Given that the main area of activity is the domestic market, investors still do not expect great risks for companies due to possible US sanctions.


Such sanctions can hit American foundations the hardest. In 2018 Silver Lake Management, Warburg Pincus and Carlyle Group invested at least 500 million dollars in Ant. And in the case of the imposition of sanctions precisely these companies could have problems to recover the investment. It is difficult for Chinese financial giants at this time to accurately assess potential damage. And it is not known if sanctions will be imposed and, if so, what they will be. But still, uncertainty is growing in the global financial system, which in itself poses a serious risk, Liu warns. So it is now important for China to focus on improving its own financial system, solving current problems and integrating into global finance, he says.


Liu Dian recalls that there is still much to be done to improve the conditions for the development of financial technologies and the institutional construction of financial systems. It is important to strengthen ties with the world financial system, he believes. Now most of the income of Chinese financial companies comes from the domestic market, and they are only now trying to internationalize, laments the expert.


“GIVEN THAT WE ARE ALWAYS UNDER PRESSURE FROM THE US, CHINESE COMPANIES MUST STRENGTHEN RISK MANAGEMENT MECHANISMS, INCLUDING INTERNATIONAL POLITICAL RISKS,” HE SAYS.


Experts consider that one thing is clear for now: if a new round of financial sanctions is imposed, China-US relations they will get even more complicated and Beijing will be forced to respond. These sanctions can even be sensitive for US companies, they warn. The five largest North American banks do business in China, with a total valuation of around $ 70 billion.


Not surprisingly, Goldman Sachs and JPMorgan have announced plans to increase their stakes in Chinese companies. The sanctions could nullify Visa and MasterCard’s plans to enter the Chinese market, which would be especially painful for these systems. That won’t like American Express either, which was the first among American payment systems to enter China.

If Washington takes more serious action and prevents access to dollar transactions to Alipay and WeChat Pay, American companies that operate in the Chinese market may be badly off. The same Marriott or KFC will simply lose customers in China. Experts highlight that abusing the pressure of US sanctions makes it clear that the current financial system serves Washington’s own interests, opina Liu.


Liu Dian is an assistant research fellow with Chongyang Institute for Financial Studies at Renmin University of China.

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