Ant and AliPay aim to broaden Alibaba Crackdown

Chinese President Xi Jinping really has it in store for Jack Ma. It’s communism versus capitalism.

Shares of Alibaba Group Holdings (BABA) fell in Hong Kong trading today, down 8.0%, amplifying a decline that began in late October. The stock is now down 29.5% since October 23, keeping it nearly flat for the year, and at its lowest level since June.

The company has lost approximately $ 116 billion in market capitalization in the past two trading days. That’s after China announced last Thursday that it would launch an antitrust investigation into Alibaba, which runs the dominant Chinese e-commerce sites Taobao and upscale Tmall.

In the latest wrinkle, Chinese regulators are attempting to restructure and possibly split Alibaba’s fintech subsidiary Ant Group, which operates the ubiquitous AliPay digital wallet app.

In a country where credit cards are not often used outside of the big cities, AliPay allows users to use their mobile phone to pay for almost anything: groceries, taxis, train tickets, movie tickets, your mobile bill, insurance …

Chinese financial regulators are now investigating Ant Group’s activities. The core of their concern is whether it has the necessary permits and capital reserves to provide the kind of financial services it does.

Ant said on Sunday it would “significantly” improve compliance by reviewing its operations. Ant executives met on Saturday with officials from, well, just about every financial regulator involved: the Chinese central bank, the People’s Bank of China; the China Banking and Insurance Regulatory Commission; the China Securities Regulatory Commission; and the State Administration of Foreign Exchange (SAFE).

Central bank deputy chief Pan Gongsheng took to the official Xinhua news service to accuse Ant of “flawed legal awareness, disregard for legal compliance requirements, foul play for regulatory arbitrage, exploiting market dominance to shut out competitors, and harming consumers’ legitimate rights and interests. “

Financial regulators have identified “major problems” in Ant’s business and are urging the company to establish a timetable “as soon as possible” to resolve them.

Pan said Ant should “return to its original activities as a payment service provider” as well as increase transparency. It should improve the way it stores personal data and perform individual credit reporting, he said.

It looks like Ant will be forced to restructure. Ant will have to set up a financial holding company, Pan said, with proper oversight, adequate capital and legal approval.

Regardless of Ant’s troubles, the state’s market regulation administration said on Thursday that it has launched an antitrust investigation into Alibaba. Ant originally only served as an escrow service for the two parties trading goods on Alibaba’s Taobao e-commerce site. The buyer parked the money with Ant, who then distributed it to the seller. However, that temporarily gave Ant huge stacks of cash. That foundation was needed to build a wide variety of financial offerings.

It is common for Taobao and Alibaba rivals such as JD.com (JD) and Pinduoduo (PDD) to require merchants to choose ‘one of two’ and only sell their wares on one ecommerce platform, for fear of passing through the other. serve. This is clearly anti-competitive and harmful to consumer choice. The most successful Chinese startups also often restrict investors from putting money into their rivals, if they want to keep investing in spin-offs from that business group.

The fintech already changed its name to Ant Group from Ant Financial to move away from its original efforts to establish itself as a financial one-stop-shop. After Alibaba figurehead Ma, who is the richest Chinese with a fortune of US $ 57.3 billion, publicly fooled China’s financial industry and regulators – he told a conference in Shanghai that Chinese state-owned banks had a ‘pawnshop mentality’ like it was about granting credit – they got revenge.

Clearly, Communist Party officials are concerned that Ant and Ma have been too liberal with their credit. The subtext of the fight is that Communist Party officials want to remind Ma and other private sector successes who are really in charge.

Shortly after Ma’s speech in late October, which was attended by influential bankers and financial regulators, the China Securities Regulatory Commission said it had engaged Ma, Ant Executive Chairman Eric Jing and Ant CEO Simon Hu for questioning. The CSRC – the equivalent of the US Securities and Exchange Commission – did not say what the discussions were about, but Ant said in a statement that “views regarding the health and stability of the financial sector were exchanged.”

Ant was then forced to withdraw its IPOs in Shanghai and Shenzhen on Nov. 3, which would be the largest in global history at $ 37 billion. The cancellation came just two days before the stock was due to start trading, and after regulators and the markets in both cities approved the offer. It is speculated that Chinese President Xi Jinping himself intervened to prevent the IPO.

The research is now being deepened. Ant last week discontinued the service that allowed customers to deposit cash at regional banks across China. This may be in conflict with rules against operating across provincial borders.

The company has also lowered many users’ credit limits so they can make purchases. Pan, the central banker, said Ant is offering “illegal credit loans,” and has questioned his insurance and asset management services.

AliPay’s rival, WeChat Pay, is run by Tencent Holdings (TCTZF) and could soon face similar pressure. Shares of Tencent fell 6.6% in Hong Kong on Monday, although they are up 38.2% in 2020 thanks to the company’s booming smartphone and online video game business.

In contrast to Alibaba’s struggle, China’s stock markets are generally flying. The CSI 300 of the largest listed companies in Shanghai and Shenzhen is up 23.6% in 2020.

It’s an impressive resurgence after the center of Wuhan became the Chinese city where the Covid-19 pandemic first erupted. According to Oxford Economics, the Chinese economy is likely to grow 2.1% this year, leading to rampant growth of 7.8% in 2021.