The Chinese government just hit the brakes on finance-minded internet firms and their “virtual credit cards”

Tencent CEO Pony Ma.
Tencent CEO Pony Ma.
Image: Reuters/Bobby Yip
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The latest attempts by China’s two biggest internet firms to expand into financial services have just been thwarted. China’s central bank ordered Alibaba and Tencent on Friday (Mar. 14) to stop processing payments through “virtual credit cards,” the new online financial products that they announced earlier this week in partnership with China’s Citic Bank.

The order called for the halt of using “QR codes”—3D barcodes that transmit web addresses and payment information—that the credit cards would have used.”The level of risk control directly impacts the users’ information security and financial security,” the regulator said in a statement on the state-run Securities Times site, as reported by the FT (paywall). Shares of Citic fell sharply on the announcement, and trading in the stock was subsequently suspended on the Shanghai and Hong Kong exchanges.

Earlier this week, Alibaba announced it would hand out 1 million virtual credit cards; within 24 hours, Tencent announced its own credit card that, like Alibaba’s, could to buy goods at a range of online stores.

The central bank’s move is a reminder that the battle for China’s millions of middle-class internet users isn’t just between the two internet giants, which have been expanding into private banking and money market funds. The two companies are now encroaching on the turf of some of China’s largest financial institutions, many of them owned and operated by the government.

Last month, a group of Chinese banks urged regulators (paywall) to beef up regulation of finance products launched by internet companies. As Quartz has reported, Alibaba’s Yu’e Bao fund—the literal translation is “leftover treasure”—is a major threat to traditional banking, in part because it can offer much higher interest rates. At the beginning of March, it had more investors than all of the country’s equity markets.

There are also signs that Tencent may be out of favor with the Chinese establishment. Observers noted that unlike other top Chinese executives, Tencent head Pony Ma was not at the National People’s Congress that ended this week. Over the last few days, at least a dozen accounts of notable bloggers on Tencent’s popular messaging app, WeChat, were closed without explanation.

The move should also affect the firms’ mobile payment services, which use QR codes to let users shop at department stores or buy snacks from a vending machine from their phones. Tencent’s stock was down 5% today in Hong Kong; its share have been falling for several days before the central bank’s announcement. Alibaba is not traded publicly, but it is planning an IPO, possibly in the United States.