China's regulators have reportedly instructed Tencent Holdings to reduce the mobile payment market dominance of its WeChat app, aligning with efforts to promote adoption of the state-backed digital currency, the digital yuan.

According to sources familiar with the matter cited by Nikkei, Tencent is facing pressure from Chinese regulators to diminish WeChat's market share in mobile payments, particularly in-person transactions conducted via QR codes. While specific targets for WeChat Pay's market share reduction remain undisclosed, the move reflects Beijing's concerns about the dominance of private tech giants in the digital payment ecosystem.

WeChat Pay, along with Ant Group's Alipay, currently dominates China's mobile payment landscape despite the presence of numerous non-bank payment institutions. The regulatory push coincides with Beijing's ongoing efforts to bolster the adoption of the digital yuan, which has encountered challenges since its pilot launch in 2020.

Despite initiatives to promote the digital currency, concerns persist among Chinese consumers, including issues related to the absence of interest on e-CNY balances and limited usability. This sentiment was echoed by Sammy Lin, an account manager at a state-owned bank in Suzhou, who expressed reluctance to keep funds in the e-CNY app due to the lack of interest accrual.

The regulatory directive to Tencent comes shortly after China expanded its digital yuan pilot to Hong Kong, marking the currency's first venture outside the mainland. Although residents of Hong Kong can now top up their digital wallets with up to 10,000 CNY via local retail banks, peer-to-peer transactions are currently prohibited.

China's mobile payment market remains lucrative, with third-party service providers facilitating over 92 trillion yuan in mobile transactions in Q1, including significant volumes from QR code transactions. By curbing WeChat Pay's dominance, Beijing aims to create space for the digital yuan to gain traction and integrate into daily financial transactions, ensuring that private tech giants do not overshadow the state-backed currency's role in the digital economy.