New announcements from China’s regulatory authorities have revealed broad plans to rein in Alibaba and Ant Group, as part of a concerted effort to strengthen state supervision of Jack Ma’s business empire. On Tuesday, multiple outlets reported that Ant Group, whose IPO was scuttled at the eleventh hour in early November, will fold its financial operations into a holding company that could be regulated much more like a bank. Bloomberg News reported on the details of the plan, which will entail higher capital requirements and curtail the fintech giant’s ability to extend loans:
The fintech giant is planning to move any unit that would require a financial license into the holding company, pending regulatory approval, said the people, who asked not be named because the matter is private. The plans are still under discussion and subject to change, the people said. Ant declined to comment.
The operations that Ant is looking to fold into the holding company include wealth management services, consumer lending, insurance, payments and MYbank, an online lender in which Ant is the largest shareholder, the people said. Under the financial holding company structure, Ant’s businesses would likely be subject to more capital restrictions, potentially curbing its ability to lend more and expand at the pace of the last few years.
That said, the proposals suggest Ant would still be able operate in financial services beyond its payments business, quelling investor concern about how to interpret the central bank’s Sunday message when it asked Ant to return to its roots as a payments provider.
[…] “Its growth would slow a lot,” said Francis Chan, a Bloomberg Intelligence analyst in Hong Kong. The valuation of the non-payment businesses, including wealth management and consumer lending, could be slashed by as much as 75%, he said. [Source]
Ant Group’s personal lending business has been a key source of revenue for the company. Its previous ability to lend more freely than banks—fintech firms were not subject to traditional lenders’ higher minimum capital requirements—allowed it to more aggressively extend loans to Chinese consumers. But new regulations issued shortly after authorities took action to halt Ant Group’s IPO introduced significantly higher capital requirements for fintech firms, which could significantly change Ant’s profitability and later valuation. The Wall Street Journal’s Xie Yu reported that this week, regulators took even more deliberate steps to force Ant to move away from personal lending, telling it to switch back to its core e-payment business:
Chinese financial regulators moved to rein in Ant Group Co., the financial-technology giant controlled by billionaire Jack Ma, telling it to switch its focus back to its mainstay payments business and rectify problems in faster-growing areas such as personal lending, insurance and wealth management.
China’s central bank on Sunday criticized Ant for its behavior toward competitors and consumers, and what regulators said was problematic corporate governance. It said the company “despised” complying with regulations and engaged in regulatory arbitrage, without providing specifics. [Source]
Even prior to the announcement, Chinese media sources reported that Ant had unilaterally scaled back its personal lending products, seemingly in anticipation of regulations to come. Interconnected newsletter’s Kevin Xu wrote about those changes, which were first reported by Chinese IT publication InfoQ:
Based on the reporting, it looks like Ant Group is already making changes internally, in anticipation of larger changes to come. For one, its consumer lending product, Huabei (or “Just Spend”), has unilaterally reduced its lending amount (in some cases from 10,000 RMB to 3,000 RMB, as shown in the screenshot below). This change is framed as promoting more responsible spending behaviors to its mostly young users. More interestingly, Ant’s many (many) subsidiaries across China are also going through some corporate restructuring to isolate its financial service units from other product lines, possibly in preparation for adapting to new rules or even some government ownership. Alibaba is infamous for having a complicated, convoluted corporate structure. Ant is not much different. It is not just a financial services company, but has a large business portfolio in industries like cloud computing, infrastructure technology, and blockchain. [Source]
Separately, the State Administration of Market Regulation (SAMR) announced an antitrust investigation into Alibaba on December 24th, one of the first into a major Chinese tech company. SAMR announced that it was looking into a practice known as erxuanyi (two choose one), through which Alibaba forces merchants to sell exclusively on its platform. E-commerce rivals JD and Pinduoduo have long complained about the practice, with the former suing Alibaba in 2015. The Financial Times’ Ryan McMorrow and Tom Mitchell reported alleged retaliatory measures taken by Alibaba after one manufacturer refused to abide by the exclusivity rules:
Last year, for example, the world’s largest microwave-oven maker, Galanz group, accused Alibaba of directing traffic away from its store on Tmall after it started selling on rival site Pinduoduo. Galanz said its sales dropped calamitously after it failed to show loyalty to Alibaba.
JD and Pinduoduo, both backed by Tencent, have also sued Alibaba for such behaviour, alleging the company abused its dominant position to prevent merchants from selling on their platforms. Alibaba previously declined to comment on the lawsuit.
As of “Singles Day” last month, China’s biggest annual online shopping event, Alibaba was still seeking to restrict merchants from working with other e-commerce platforms, said a lawyer representing a major e-commerce platform in an antitrust lawsuit against Alibaba. While there was no explicit ban on doing so, merchants could see their page rank plummet on Taobao or Tmall after they began selling on competing platforms, the lawyer said. [Source]
Analysts have diverged in interpreting the significance of the last two months’ slew of regulatory actions against China’s tech giants. Some have interpreted the moves as authorities’ attempts to zero in specifically on Jack Ma, whose outsized personality and outspokenness may have caught up with him. Others have welcomed the regulatory action as long awaited for a sector that had been allowed to operate untouched, to the potential detriment of consumers.
In November, it was reported that Xi Jinping personally oversaw the halting of Ant Group’s IPO, after hearing about a speech by Jack Ma in which he lambasted regulators for having a “pawn shop mentality.” But even with permission from the very top, as Lingling Wei reported for the Wall Street Journal, Chinese regulators are under pressure to balance expanding their oversight over big tech with taking care to avoid the perception of blocking innovation and entrepreneurship:
Chief among them is avoiding the perception of dealing a significant blow to entrepreneurship at a time when the private sector is seen to be losing ground to state-owned firms. In addition, the leadership is worried about a backlash from international investors at a time when Beijing wants to fend off growing doubts over its commitment to market reforms and to nurture more homegrown companies like Alibaba that can compete with their American counterparts.
To allay fears of the state overreaching, the officials said, authorities chose a deputy central-bank governor with a pro-market reputation to detail the actions against Ant this week in a publicized question-and-answer statement.
Pan Gongsheng, the deputy governor who previously oversaw the share sales for two of China’s biggest state-owned banks before moving to the People’s Bank of China, urged Ant to overhaul its business based on market and legal principles.
Still, Mr. Pan emphasized the need for the company to “integrate corporate development into overall national development,” according to remarks released by the central bank on Sunday. [Source]