Foreign Investors Blocked from China’s Online Payment Market?

Posted by Reading Time: 5 minutes

By Vivian Ni

Sept. 12 – China’s online payment market is undergoing major changes under the People’s Bank of China’s (PBC’s) requirement for a license from third party payment companies. As PBC regulations did not clarify what the threshold is for foreign investors in the field to obtain a license, foreign online payment companies will basically find it very difficult to enter the market. In addition, a number of third party payment companies have also been busy clearing out their foreign holdings in a bid to obtain licenses as soon as possible.

Can foreign investors get a license?
To the question “Can foreign investors get a payment license?” the PBC did not give a strict “no,” but the “Measures for Management of Non-financial Institutions’ Payment Services (PBC Decree [2010] No.2)” released in June last year have diminished the hope of foreign players to continue owning a piece of the market or entering the market in the future. The major provisions that impact foreign investors are as follows:

  • All non-financial institutions shall obtain a license to engage in the payment business; existing third-party payment companies shall not continue their business if they fail to obtain a license before September 1, 2011
  • Institutions shall meet certain qualifications to become eligible applicants, but required qualifications of foreign-invested payment institutions will be specified “some other time”

Major Chinese online payment companies – many of which have foreign holdings – were therefore not given much time to wait on the release of “specific qualifications” required from foreign-invested payment institutions. They acted swiftly to eliminate their foreign background in order to obtain the licenses before the deadline hits. Alipay – the e-commerce company Alibaba’s third-party online payment platform that took up 45.5 percent of transaction value in the Chinese market during the first quarter – transferred its Cayman Islands-based ownership from the Alibaba Group to a private company controlled by Alibaba’s owner Ma Yun in 2009 and 2010.

China UnionPay, the only domestic bank card organization in China whose online payment business took up 11.7 percent of transaction value in Q1, also transferred part of its shares controlled by three foreign shareholders to Chinese companies, in order to become wholly Chinese-owned and qualify for license application.

There were also rumors that the license of Tenpay – the online payment platform of China’s largest internet company Tencent – was withdrawn because the PBC was not happy about Tenpay being a variable interest entity (VIE) in which foreign investors hold controlling interest based on certain agreements, rather than the majority of voting rights. Although Tenpay later denied the rumor as well as its VIE identity, the incident fully reveals how much payment companies are concerned over their foreign background when applying for the license which is critical for the future of their business.

Starting from May 18 of this year, the PBC has already issued payment licenses to 40 payment companies, including the three companies mentioned above. However, according to related reports, there are still 134 applicants waiting for their licenses and Gaohuitong – the only applicant with a Hong Kong background – is one of them. Commentaries say Gaohuitong’s application result will likely reflect how high the threshold is for foreign investors that want to enter this market.

Tougher environment for VIEs
The PBC’s restrictions on foreign holdings in payment companies have also made it more difficult for foreign investors who look to enter a certain industry in China through VIEs.

VIE is a term used by the United States Financial Accounting Standards Board in its FIN 46 statement to refer to an entity (the investee) in which the investor holds a controlling interest that is not based on the majority of voting rights. In China, numerous internet companies – including some big names – have financed themselves through being their foreign investors’ VIEs. Therefore, although they operate legally in China as wholly Chinese-owned companies, their foreign investors have genuine control over the companies based on certain agreements between the two parties.

Prevailing in China for over 10 years, VIEs have become a way for foreign investors to share profit with their Chinese investees even in some industries where foreign entry is restricted.

However, this time for payment license applicants, VIEs are no longer a shortcut for them to take to appear as a pure Chinese company and avoid supervision. According to a report by the Guangzhou-based 21st Century Business Herald, the PBC has issued an announcement during the first quarter of the year, requiring all the license applicants to hand in written statements to clarify whether or not they are controlled by foreign investors through being their VIEs.

The recent “Regulations on the Implementation of Security Review System for Mergers and Acquisitions (M&As) of Domestic Enterprises by Foreign Investors (MoC Announcement [2011] No.53)” released by the Ministry of Commerce (MoC) on Aug 25 also emphasized the foreign M&As through the avenue of VIEs will face security checks, indicating foreign investments through VIEs will be under stricter supervision of the government.

Domestic venture capital (VC) investors and internet company starters appreciate the contribution VIEs made to the growth of China’s internet industry and hope the Chinese government will not identify VIEs as completely illegal someday. Xue Manzi, a VC investor, believes the official challenge against the VIEs will be a total “disaster” to thousands of starters in the digital industry, who usually have great ideas and skills but lack start-up capital.

Foreign online payment companies’ next choice: M&As
The requirement for payment licenses is bringing a shuffle to the whole market. Before the PBC releases any new regulations, existing foreign players in China’s online payment market may be forced to look for Chinese acquisition to maximize their return in the region, and domestic players who already have the license will likely expand their international influence through such M&A deals.

The market has already seen the first M&A deal shortly after the September 1 deadline. On September 5, Alipay announced the acquisition of OnCard Payments, the third-party service subsidiary of the British company Oncard International. The deal will allow passengers of Cathay Pacific, Dragonair and EVA Air to purchase tickets through AliPay’s platform.

A commentary by the 21st Century Business Herald believes a major wave of M&As in the industry is going to start soon.

Western economic watchers see the recent reform in China’s online payment market as a typical example of China’s open-door-then-close-door approach to foreign investments. While China’s rise and opening-up policy are attractive to most foreign investors, risk of sudden re-regulation should also be taken into consideration when making investment decisions.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China. In particular, the firm specializes in all matters relating to mergers and acquisitions in the country. For advice on such matters, please email, visit, or download the firm’s brochure here.

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