China Eyes Shrinking Business Empire

Regulators, led by the central bank, also ordered Ant to form a separate financial holding company that would be subject to the type of capital requirement applied to banks. This could open the door for large state banks or other types of government-controlled entities to buy the company to help strengthen its capital base, say officials and advisers.

China National Pension Fund, China Development Bank and China International Capital Corp.

, the largest state-owned investment bank in the country, are already investors in Ant.

Mr. Ma, the richest person in China, helped define China’s new economy with the two companies he founded – Ant and his e-commerce affiliate Alibaba Group Holding Ltd. His business encompasses payment services, online retail, computing cloud, asset management and loans. Separately, Alibaba is facing an antitrust investigation that could also lead to a review of its business and asset sales.

The People’s Bank of China and the State Administration of Market Regulation, which regulate Ant and Alibaba, did not respond to requests for comment. Ant declined to comment. Mr. Ma and Alibaba did not respond immediately.

But in looking to Ma, Chinese leaders face a difficult balancing act, trying to keep entrepreneurs like him in check – without harming the innovative spirit that helped boost China’s technological and economic growth.

“Without a doubt, the goal is to control Ma Yun,” said an adviser to the anti-monopoly committee of the State Council of China, the country’s main government body, using the Chinese name of Ma. “It’s like putting a rein on a horse.”

It is difficult to overestimate the role that Ma’s companies have played in the Chinese economy. Together, Ant and Alibaba have allowed hundreds of millions of Chinese consumers and businesses to make a purchase, deposit money, execute an investment or borrow with the touch of a thumb.

Until recently benefiting from a relatively light regulatory touch, Ma’s companies have come to challenge the dominance of the state sector in areas such as banks and money management.

But the days of laissez-faire are over. In recent months, officials have pledged to tighten regulations for an Internet sector that is growing in size and impact. While a few other companies are also under scrutiny, including popular social media application operator WeChat, Tencent Holdings Ltd., and Didi Chuxing Technology Co., regulators, for now, are focusing their attention on Ma and his companies.

Ma, flashy and outspoken, has long run into clashes with regulators, especially those of the People’s Bank of China, who have become wary of an expanding empire that they fear is out of control and have tried to impose restrictions.

The tension peaked in late October, when Mr. Ma openly criticized leader Xi Jinping’s risk control initiative, while also criticizing regulators for stifling innovation – in a speech that took place a few days before Ant, in which he is the controlling shareholder, has been set to go public.

Prior to the speech, Mr. Xi paid little attention to Ant’s planned IPO, according to a person with knowledge of the regulatory process. “Thanks to Ma himself, the IPO entered Xi’s radar,” said the person.

Mr. Ma’s attack on regulators quickly backfired. This led Xi to personally cancel the initial public offering, which was expected to be the largest ever and would have valued Ant at more than $ 300 billion, and to instruct regulators to examine the risks posed by Ma’s empire.

Since then, the Chinese market and financial regulators have taken action. The authorities are particularly concerned about how Ant uses the data leveraged by its payment app Alipay to encourage banks to work with the company in lending to consumers and small businesses. Ant finances only a fraction of the loans, with most of the funds coming from banks, leaving them with credit risks.

But even Xi, the most powerful leader in China’s recent history, faces restrictions on how far his government can go to crack down on Ma’s empire.

The main one is to avoid the perception of giving a significant blow to entrepreneurship at a time when the private sector is losing ground to state-owned companies. In addition, the leadership is concerned about a reaction from international investors at a time when Beijing wants to dispel growing doubts about its commitment to market reforms and to feed more local companies like Alibaba, which can compete with their American counterparts.

To allay the fears of the state’s exaggeration, officials said, the authorities chose a central bank deputy governor with a pro-market reputation to detail the actions against Ant this week in a question and answer statement.

Pan Gongsheng, the deputy governor who previously oversaw the sale of shares in two of China’s largest state-owned banks before moving to the People’s Bank of China, urged Ant to reshape his business based on legal and market principles.

Even so, Pan emphasized the need for the company to “integrate corporate development into general national development,” according to comments released by the central bank on Sunday.

Ant said in a statement on Sunday that it will comply with regulatory requirements and develop a plan and timetable for the requested reform. At a meeting with regulators in November, Ma offered the government “whatever platform Ant has, as long as the country needs it”, in an apparent effort to save its relationship with Beijing. Mr. Ma has not appeared in public since his October speech.

Meanwhile, China’s market regulator last week launched an antitrust investigation into Alibaba, which owns a third of Ant, on allegations that the company used its dominant position in the market to pressure traders to sell only on its platforms.

Authorities are also concerned about Alibaba’s threat to traditional brick and mortar retailers. “We have received a lot of complaints about Alibaba squeezing smaller rivals and its internet platforms taking business from others,” said a regulator with knowledge of the investigation.

Wang Fuqiang, who owns a laptop store in Beijing, is among those who felt the pinch. Mr. Wang’s store has seen sales drop steadily as more people shop on Taobao, an online shopping site owned by Alibaba, and JD.com Inc.,

another major e-commerce player.

“Now, most shoppers come to my store to try laptops and take pictures,” said Wang, who has run the store for 17 years. “So, they would go away and buy online.”

—Bingyan Wang contributed to this article.

Write to Lingling Wei at [email protected]