IT TAKES SOME deft reading between the lines to understand the unexpected decision by China Cinda Asset Management, a bad-debt manager controlled by the finance ministry, to drop its backing for the restructuring of Ant’s consumer finance business.
The only public reason that China Cinda has given for backing out late last week from its announced 6 billion yuan ($940 million) participation in a 22-billion-yuan funding round for the reformulated version of Ant’s consumer finance business is “further prudent commercial consideration and negotiation.”
As part of the ‘rectification‘ of Jack Ma’s Ant Group that commenced with regulators pulled the rug from under the group’s planned blockbuster $37 billioninitial public offering in November 2020, Ant’s two consumer finance businesses, Huabei and Jiebei, were to be consolidated as Chongqing Ant Consumer Finance, in which Ant’s stake would be capped at 50% and regulatory oversight extended.
Authorities are pruning back the growth of China’s tech platforms for various policy reasons, from reining in financial risk to concerns about misuse of consumer data, overweening market power and a feeling that the platforms and their billionaire owners are just getting too big for their boots.
Yet authorities also have concerns about the four bad-debt managers straying from their core mission, especially now their cash flows are being squeezed and debt ratios rising. After all, there is still a potential real-estate sector meltdown to worry about. There is no appetite to repeat the bailout of China Huarong Asset Management, the largest of the four state-backed bad-debt managers established in the late 1990s to clean up the ugly parts of the large state-owned banks’ loan books.
The China Banking and Insurance Regulatory Commission (CBIRC) recently instructed the bad-debt managers to return to their core businesses of managing bad loans and distressed assets.
China Cinda already owns 15% of Chongqing Ant through its wholly-owned subsidiary Nanyang Commercial Bank. Expanding that to become the second-largest shareholder in China’s largest consumer finance company does not fit CBRIC’s mandate.
ANT GROUP HAS applied to become a financial holding company. That will put Jack Ma’s fintech group spun out of Alibaba under central bank oversight. Thus authorities tighten their grip a significant notch over the sprawling fintech sector.
The somewhat imposed decision on Ant will require it to restructure itself as a payments services company. That was what regulators told the company to do after forcing the pulling of Ant’s proposed blockbuster initial public offering (IPO) last November. However, the first go-round did not pass muster. The central bank and the three other top financial regulators hauled in Ant executives on Monday for further talks.
Following those, the People’s Bank of China announced the company will now adopt its new structure as part of a ‘comprehensive and feasible rectification plan’ following its coming under strict regulatory oversight last year.
Critically, Ant has agreed to decouple its Alipay mobile payments app from other financial services it offers, such as unsecured online lending via its Huabei virtual credit card and Jiebei consumer loans. The company says its focus will be on enabling micro-payments for consumers and small-and-medium-sized enterprises, which is how it started. As part of this, it will set up a personal credit reporting company and improve consumer data protection. A separate (regulated) Ant consumer finance company will run Huabei and Jiebei.
The company also says it will improve its consumer data protection, rectify monopolistic behaviour and shrink the assets under management of Yu’e Bao, its giant money-market mutual fund. These changes all toe the new party lines for reining in the internet giants and scaling back highly leveraged lending.
Ant also contritely says it will plan its growth ‘within the national strategic context’ and ‘contribute to the new development paradigm of domestic and international circulations’. This reinforces the view this Bystander expressed previously about the platform companies being marshalled into becoming a ‘strategic height’ of the economy and a competitive advantage for China internationally.
The freewheeling days for fintech are now over. Ant’s affiliate Alibaba’s record 18.2 billion yuan ($2.8 billion) antitrust fine was further warning that Ant and all the other fintech companies will have to behave like traditional financial institutions and do as their regulators tell them in line with national policy objectives.
Where this leaves Ant’s IPO is uncertain. The restructuring will make the group less valuable than the $34 billion it was initially hoping to raise. Alipay has more than one billion users in China and holds approaching three-fifths of the $17 trillion mobile payments market, well ahead of its closest rival Tencent’s WeChat Pay’s two-fifths. That dominant market share tied together a vast and detailed trove of consumer data collected across Alibaba and Ant.
Weakening the ability to use Alipay across all its services will reduce those market shares, which is also the intent of new draft measures announced in January to curb market concentration in online payments.
Update: The State Administration for Market Regulation has told 34 internet platform companies, including Tencent, ByteDance, Pinduoduo, Baidu and JD.com, to get any anti-competitive practices sorted out within the next month — confirmation, as if it was needed, that the crackdown on Ant Group and Alibaba is neither all about Jack Ma nor over.
THE ANTITRUST FINE on Alibaba is hefty — a record in yuan terms –but not as punitive as it could have been.
The 18.2 billion yuan ($2.8 billion) that the e-commerce giant will have to pay for abusing its market dominance tops the $975 million imposed on the US chipmaker Qualcomm in 2015 but is equivalent to only 4% of Alibaba’s revenues. Qualcomm’s was 8%, and the maximum penalty authorities can impose is 10%. Further, the State Administration for Market Regulation (SAMR) took a narrow view of Alibaba’s revenue, counting just those from its e-commerce businesses.
None the less, this amounts to more than just a slap on the wrist. It also reinforces a message that has been repeatedly sent for several months.
Authorities are reining in the power of the tech platform giants, among whom Alibaba and its sprawling empire of associated businesses is the poster child. They thrived in a sector that never had the moderating influence of large state-owned enterprises. Alibaba was disingenuous when it said in its post-fine letter of contrition:
Alibaba would not have achieved our growth without sound government regulation and service, and the critical oversight, tolerance and support from all of our constituencies have been crucial to our development.
It and its main rival Tencent grew massive because of the absence of state guidance. Party leadership is being plain that the Party calls the shots, no matter how large the tech platforms’ social and economic influence grows. The da y’s of light regulation are over. The tech sector will become subject to the same level of regulatory oversight as any other.
Attacking Alibaba and its main rivals on antitrust grounds – the specific charge against Alibaba is that it restricted competition by forcing vendors on its Tmall and Taobao online shopping platforms to deal exclusively with it — provides consumer-protection gloss to the actions. A dozen companies were fined last month for antitrust violations, including Tencent and Baidu (the other two of the ‘big three’ Chinese internet giants) and the ride-hailing app Didi Chuxing.
Financial regulators are also concerned that the rapid expansion of fintech — services such as AliPay — beyond payments systems is creating new avenues of unregulated shadow banking that will add to the overall leverage within the economy that already greatly concerns authorities. Preventing what is termed ‘disorderly expansion of capital’ is now policy. Regulators forcing Alibaba’s spun-off fintech, Ant Group, to pull its proposed blockbuster $37 billion initial public offering last November was another indication of that.
Jack Ma, Alibaba’s founder and China’s most prominent and outspoken tech billionaire inside and outside the country, has been particularly in authorities’ crosshairs. Last week, his Hupan University, an elite business academy that teaches entrepreneurship, was made to suspend new enrolments. Elite educational establishments outside Party control are viewed with official distrust.
Alibaba has also been pressed into divesting its media assets. It owns video streaming and sharing sites in China and Hong Kong’s leading English-language newspaper, the South China Morning Post.
More worrying is that the crackdown may bring restrictions on its ‘secret sauce’: its ability to combine the many businesses it has diversified into, from physical retail to food delivery and cloud computing, with its core e-commerce and social platforms, thus turbo-charging its ability to cross-sell.
In November, SAMR released draft rules to prevent price-fixing, predatory pricing and unreasonable trading conditions. They also included restrictions on using data and algorithms to manipulate the market, which could curtail the platforms from data cross-subsidisation to target specific customers. That would be a wounding blow to the big platforms’ business models.
It may also bring them closer into line with national economic objectives. By making the platform companies exit non-core operations and forcing more competition in their core business, Beijing may be co-opting them to the cause of global leadership in high-tech industries. Without access to the easy money from monopolistic practices, the tech giants will instead undertake more fundamental R&D and innovation to support national technological self-sufficiency. Or at least, so the theory goes.
JACK MA’S REAPPEARANCE speech was as humble and dutiful as his previous one, last October, was caustic and critical.
After a nearly three-month absence from public view that sparked rumours that the high-profile billionaire founder of Alibaba and its fintech spin-off Ant Group had been detained by authorities displeased by his dismissive criticisms of China’s financial regulators, Ma joined a meeting of 100 rural teachers by video link. (The screenshot above is from a clip posted to social media.)
His presentation touched on two issues dear to the heart of Party leadership: that the country had eradicated poverty; and that entrepreneurs had a duty to serve society, in this case by supporting teachers and improving rural education.
It was unclear where Ma was speaking from, nor did he mention where he had been of late.
Between Ma’s two public appearances, regulators had forced the last-minute pulling of Ant Financial’s initial public offering and started an antitrust investigation into Alibaba as part of a broader reining-in of the private tech companies.
Ma, too, will find himself on a tighter leash and make sure not to strain against it. The same will be true for his companies, as this Bystander suggested previously.
However, his reappearance alone will be of some reassurance to investors. Nonetheless, that does not give China’s tech giants and their leaders any latitude to step out of line.
JACK MA’S ANT GROUP, the fintech affiliate of e-commerce giant Alibaba, is to be restructured following the regulatory squashing of its would-be blockbuster initial public offering in November. The company says it is working on a timetable to meet the requirement of China’s regulators that it returns to being a payment-services provider at core (ie, go back to being just Alipay).
This will involve overhauling its lending, insurance and wealth management businesses to strip down their complexity, and then putting them under a single financial holding company. People’s Bank of China officials have told the company to do that to ensure both capital adequacy and compliance regarding related transactions while protecting personal data privacy in its credit-scoring services — the velvet glove of prudential regulation over the iron fist of supervision.
By corralling its financial businesses in a separate subsidiary, Ant will be better placed to comply with the new regulations on financial holding companies that took effect in November and mitigate the risk of a forced full-scale break up of the group, if not of having to bend to the regulators’ will.
November’s regulations require non-financial companies that control businesses in at least two different financial sectors to have a central bank-approved financial holding company to control them.
There is an element of bringing Ma to heel in the high-profile application of the new regulations to Ant. It also fits with the reining-in of the large tech companies that grew up outside the orbit of state-owned industries.
However, regulators are intent on tightening their grip on non-financial companies moving into financial services, including innovative fintech-enabled services such as online microcredit, as part of their broader desire to rein in systemic financial risk.
The restructuring will likely crimp Ant’s growth. For one, it will face tighter oversight and higher capital adequacy requirements, especially in highly-leveraged business lines such as online microcredit.
The overhaul of Ant’s financial businesses may also result in some regulator-driven divestment. That could eliminate synergies between Ant’s fast-growing fintechs and its existing businesses. It is in exploiting those synergies that the group’s real value lies.
CHINA’S PRIVATELY OWNED internet companies flourished in large part because they created a de novo area of the economy and thus had no state-owned competitors from the outset. That space is now being closed down, or at least being put under state sway.
New restrictions on the fintech sector led to last week’s abrupt suspension of Ant Group’s proposed blockbuster initial public offering and a public embarrassment of Jack Ma, its billionaire founder. This week, draft regulations have been announced that, when implemented (formally they are out for public comment), would curb monopolistic practices by internet platform and e-commerce companies such as Alibaba Group, also founded by Ma, and Tencent Holdings, the operator of We Chat founded by another of China’s richest men, Pony Ma.
The corporate behaviour that would be proscribed includes collusion to share sensitive consumer data, alliances to squeeze out smaller rivals and to subsidise services at below cost to eliminate competitors. The internet platforms may also have to apply for an operating licence if they use the governance structure known as a Variable Interest Entity, which is standard for internet companies as it lets them have foreign investors and list on overseas exchanges but exists in something of a grey area when it comes to Beijing’s blessing.
After a meeting earlier this month between antitrust and cyberspace officials and two dozen tech giants, authorities issued a statement giving fair warning of the new mood:
Internet platforms are not outside the reach of antitrust laws, nor are they the breeding ground for unfair competition.
Nothing will happen immediately. The State Administration of Market Regulation watchdog is taking public comments until the end of this month. As always, it will be the application of the administrative rules once the regulations are formalised that will matter.
The State Council has also said new regulations on internet transactions will be coming next year. Yet the message from the Party to some of the country’s most powerful companies and private billionaires is clear. The bonus for authorities is that the new rules should also bring some protections for consumers and small businesses, which will be popular.
China is far from the only country struggling with the power and disruptive horizontal spread of big tech. The EU and the United States are facing variants of the same issue.
However, in China, the Party has the additional complication of having to stop the horizontal spread of the platforms into areas, such as banking, in which state-owned enterprises are not only dominant but also essential policy tools.
Authorities also have to balance promoting internationally competitive Chinese tech companies with keeping them under firm control at home — a microcosm of what will be one of the most significant challenges for the Party in moving the country up the development ladder to the innovation-based economy.
WHEN WE SAID we thought that the initial public offering (IPO) of Jack Ma’s Ant Group might come to be seen as an inflexion point in global capital markets, we thought it would be because raising such a considerable sum –$35 billion — outside of the United States would be a milestone in the development of China’s capital markets. But the abrupt pulling of the IPO of the fintech affiliate of Ma’s Alibaba group just days ahead of its scheduled launch because of ‘unexpected changes in the regulatory environment’ lays down a marker of a different sort, the power of China’s regulators.
Authorities from the People’s Bank of China and three other top financial regulators summoned Ma on Monday to inform him they had belatedly detected shortcomings, reportedly in Ant’s lucrative micro-lending units that will require reapplications for national operating licences and capital increases and restructurings. These will be necessary to comply with new regulations that took effect on November 1 to rein in systemic risks posed by companies that straddle at least two financial business lines. Ant’s businesses range from payments to lending, asset management and insurance.
This was no quiet word to the wise, but a none-too-thinly-veiled reminder to a business — and its owner — that is a threat to China’s state-run lenders, and thus by extension to the administration of state capitalism, that political loyalty and effectiveness as a policy instrument is just as expected of private companies as state-owned enterprises. Whether further actions are taken against other parts of Ant’s business will indicate the severity of the warning.
Ma may now judge as injudicious his recent likening of the big, state-owned banks to pawn shops and criticism of the Basel Accords, which set out capital requirements for banks, as a club for geriatrics.
The latter was part of a provocative futurist speech delivered in front of many of the country’s top financial regulators. They hold to the old-fashioned view that risk management, not innovation and growth is the foundation of a sound financial system. Nor will they have cared for Ma’s argument that China has no systemic financial risk as it has no financial system, and thus no need for systemic risk management. Authorities believe with good reason that there is cause to be wary of financial instability.
Ma is not the first fintech entrepreneur to hold that regulators and legacy lenders are dinosaurs, out of touch with digital innovation and the financial systems of tomorrow. He will not be the last to learn that until tomorrow comes, it is the innovators who have to comply with the regulators, not the other way round.
THE INITIAL PUBLIC offering (IPO) of shares in Jack Ma’s Ant Group may become to be seen as having been an inflection point in global capital markets. Even just a few years back the thought of raising $34 billion anywhere but in New York would have been incredible.
No longer. Next week’s dual listing in Shanghai and Hong Kong will be evidence of that. Ant’s IPO will be the largest ever and will value the Alibaba Group financial technology affiliate at $313 billion. That would make Ant more valuable than the largest US bank, JP Morgan Chase.
The Trump administration talks of excluding Chinese firms from US capital markets as a sanction. That is what is now starting to sound as lacking credence.
IT IS EASY to overdo the symbolism in the fact that the biggest tech company listed on a U.S. exchange will soon be Chinese. Jack Ma’s e-commerce giant, Alibaba, is expected to to be valued at at least $163 billion after its forthcoming initial public offering on the New York Stock Exchange, eclipsing the $100 billion valuation Facebook achieved with its IPO.
If the share sale raises the expected $21.1 billion, and that would be a conservative sum given some of the hype that has preceded the newly filed prospectus, Alibaba’s would set an new high-water mark for a technology IPO, and be the third largest IPO from any sector. If pre-sale demand for its American Depositary Shares proves to be exceptionally strong, the offering might be repriced so that it topped the record $22.1 billion that Agricultural Bank of China raised in July 2010. Final pricing is expected during the week of Sept. 15th.
For now, the company’s business is China-centric, and is being touted to foreign investors as a way to tap China’s economic rebalancing with the expectation that e-commerce will take an increasingly larger slice of a growing pie of consumer consumption, though prospective investors should note that rivals such as Baidu, Tencent and JD have growing aspirations to loosen Alibaba’s grip on the wallets of the country’s growing middle class. But in a letter to investors, Ma made plain his global ambition. “In the past decade, we measured ourselves by how much we changed China. In the future, we will be judged by how much progress we bring to the world.” It is then that the symbolism will take on more substance.
Since time immemorial professional football clubs have been the playthings of successful businessmen. Alibaba’s Jack Ma, by taking a 50% take in Guangdong Evergrande for 1.2 billion yuan ($192 million), is following an ancient tradition.
Why is he doing it? He has shown no interest in the game previously.
There may be money to be made. Talk is of an eventual public flotation of the club, though in Europe listed football companies have not proved particularly successful for investors. Many have reverted to closely held ownership.
It may be that there is a branding play for Alibaba as it spreads its wings beyond e-commerce, Ma has couched his investment in the football club in terms of buying entertainment content. He would not be the first billionaire to see football as such. Rupert Murdoch was a pioneer in that regard. Evergrande’s success on the field since real estate tycoon Xu Jiayin bought the club in 2010, makes it preeminent among China’s teams, a prerequisite for building a merchandising and media brand.
Alibaba has been on a spending spree ahead of its planned blockbuster listing in the U.S., splashing out some $6 billion on acquisitions to broaden its portfolio of businesses. Most have been Internet companies, but it is starting to make inroads into media and entertainment. Sport, though much changed by television, has not been significantly disrupted by technology. At least not yet. And it is not costing Ma much in the global scheme of things to try.
China Bystander 