China ordered Ant to rethink its fintech businesses – from asset management to consumer credit and insurance lending – and return to its origins as a payment service.
Although the central bank statement on Sunday was in little detail, it poses a serious threat to billionaire’s growth and most lucrative operations Jack Ma‘s online financial empire. Regulators were no longer directly asking for the company to break up, but stressed the importance of Ant “seeing the need to overhaul his business” and saying it should come up with a plan and timetable as soon as possible.
Authorities also denounced Ant for substandard corporate governance, disregard for regulatory requirements, and involvement in regulatory arbitrage. The central bank said Ant used his dominance to shut out rivals and hurt the interests of its hundreds of millions of consumers.
Ant said in response it will set up a dedicated team to meet regulators’ demands. It will maintain business for users and pledge not to raise prices for consumers and financial partners while ramping up risk management.
The Hangzhou-based company must establish a separate financial holding company to comply with the rules and ensure it has sufficient capital, regulators added.
Here are some of the scenarios from investors and analysts as to what the restructuring could look like:
Mild
Optimists say regulators are merely claiming their right to oversee the country’s financial sector by sending a warning to Internet companies with no intention of drastic change.
Beijing could be an example of Ma’s Ant, the largest of a line of new but ubiquitous fintech platforms. These kinds of harsh measures in the past have hit companies in the short term and left them largely unharmed. Social media giant Tencent Holdings Ltd.for example, became a prominent target of a campaign to combat gaming addiction among children in 2018. Although the stocks took a hit, they eventually rebounded to record highs.
Ant’s affiliate, Alibaba Group Holding Ltd. similarly regained investor confidence following short-term sell-offs following allegations by authorities over everything from unfairly squeezing traders to turning a blind eye to counterfeits on its e-commerce platform.
“I don’t think regulators are considering splitting Ant, as no fintech company in China has a monopoly position,” said Zhang Kai, an analyst at market research firm Analysys Ltd. “The move not only targets Ant, but also warns other Chinese fintech companies.”
Some see it as an opportunity for Ant. With the industry as a whole facing tougher surveillance, Ant has more resources to face the challenges as an industry leader, Zhang said.
Bad
A more alarming outcome would be if regulators decided to split Ant Group. That would complicate the shareholder structure and hurt the company’s fastest-growing businesses.
Worth about $ 315 billion before the IPO, Ant raised investments from the world’s largest funds. Among them: Warburg Pincus LLC, Carlyle Group Inc., Silver Lake Management LLC, Temasek Holdings Pte, and GIC Pte.
Global investors backed the company when it was valued at approximately $ 150 billion in its latest round of fundraising in 2018. A break would make the returns on their investments uncertain, with the timeline for an IPO due in November. the distant future.
The government could ask Ant to split off its more lucrative asset management, credit and insurance business and turn it over to a financial holding company that will be more heavily controlled.
“The emerging reality is that Chinese regulators are passing similar regulations for banks and fintech players,” said Michael Norris, research and strategy manager at Shanghai-based consultancy AgencyChina.
Only Ant’s payment activities leave much less to the imagination. While the service handled $ 17 trillion in transactions in one year, online payments were largely loss-making. The two largest mobile payment operators, Ant and Tencent, have heavily subsidized the companies and use them as a gateway to convince users. To make money, they used payment services to cross-sell products, including wealth management and credit.
“Ant’s growth potential will be limited with the focus back on its payment services,” said Chen Shujin, a Hong Kong-based chief of financial research in China at Jefferies Financial Group Inc. “On the mainland, the online payments industry is saturated and market share has almost reached its limit.”
Nightmare
In the worst case scenario, Ant would give up his money management, credit and insurance activities and cease operations in the units serving half a billion people.
Her asset management business, including the Yu’ebao platform that sells mutual funds and money market funds, accounted for 15% of sales.
Credit technology, including Ant’s Huabei and Jiebei units, was the largest source of income for the group, contributing 39% of the total in the first six months of this year. It provided loans to approximately 500 million people.
That outcome would be supported by the idea that China’s leaders have become frustrated with the swagger of tech billionaires and want to teach them a lesson by killing their companies – even if it hurts the economy and markets in the short term.
China’s private sector has maintained a delicate relationship with the Communist Party for decades and has only recently been recognized as a central factor in the country’s future. Many commentators have attributed the recent crackdown on fintech companies to comments Ma made at a conference in October when he found attempts to rein in the burgeoning field shortsighted and outdated.
Together, Alibaba, Ant and Tencent had a combined market capitalization of nearly $ 2 trillion in November, putting state giants such as Bank of China Ltd. as surpassed the most valuable companies in the country.
The trio has invested billions of dollars in hundreds of emerging mobile and internet companies and has achieved kingmaker status in the world’s largest smartphone and internet market by users.
“The Communist Party is the end product in China. It controls everything, ”said Alex Capri, a Singapore-based research fellow at the Hinrich Foundation. “There is nothing that the Chinese Communist Party does not control and anything that appears to be thrown out of its orbit in any way will be pulled out very soon,” he said, adding “we can expect more from that.”