China ordered Ant to reexamine its fintech business – ranging from wealth management to loans and consumer credit insurance – and return to its roots as a payment service.
While the central bank’s statement on Sunday was brief in detail, it poses a serious threat to the billionaire’s growth and more profitable operations Jack Maonline finance empire. Regulators stopped asking directly for the company to be broken up, but stressed that it was important for Ant to “understand the need to reform his business” and told him to come up with a plan and schedule as soon as possible.
The authorities also criticized Ant for his below-average corporate governance, disdain for regulatory requirements and involvement in regulatory arbitration. The central bank said Ant used its domain to exclude rivals, damaging the interests of hundreds of millions of consumers.
Ant said in response that it will assemble a special team to meet the demands of regulators. It will maintain commercial operations for users, promising not to raise prices for consumers and financial partners, while intensifying risk controls.
The Hangzhou-based company needs to create 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 about what the restructuring might look like:
Light
Optimists say regulators are merely reaffirming their right to oversee the country’s financial sector, sending a warning to internet companies with no intention of drastic changes.
Beijing may be trying to make Ma’s Ant an example, the largest among a series of new, but widespread, fintech platforms. Previous crackdowns of this nature have affected companies in the short term, leaving them virtually unharmed. Social media giant Tencent Holdings Ltd., for example, became a prominent target of a campaign to combat gambling addiction among children in 2018. Although their actions have taken a hit, they have finally recovered to historic levels.
Ant Affiliate, Alibaba Group Holding Ltd., likewise, has regained investor confidence after short-term sales following accusations by authorities on everything from unfairly pressuring merchants to turning a blind eye to counterfeiting on its e-commerce platform.
“I don’t think regulators are thinking of breaking Ant, as no fintech company in China has a monopoly status,” said Zhang Kai, an analyst at market research firm Analysys Ltd. “The law is not just about Ant, but also send a notice to other Chinese fintech companies. ”
Some see this as an opportunity for Ant. With the industry as a whole facing tighter supervision, Ant has more resources to address challenges as an industry leader, said Zhang.
Bad
A more worrying result would be if regulators decide to separate Ant Group. This would complicate the ownership structure and undermine the company’s fastest-growing businesses.
Valued at around $ 315 billion before the suspension of its initial public offering, Ant has captured 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 supported the company when it was valued at around $ 150 billion in its last round of fundraising in 2018. A breakup would make the return on its investments uncertain, with the schedule for an IPO that would expire in November now pushed for the distant future.
The government could ask Ant to break up its most profitable operations in wealth management, credit loans and insurance, transferring them to a financial holding company that will face tougher scrutiny.
“The emerging reality is that China’s regulators are adopting similar regulations in relation to banks and fintech companies,” said Michael Norris, research and strategy manager at Shanghai-based consultancy AgencyChina.
Only Ant’s payments business leaves much less to the imagination. Although the service managed $ 17 trillion in transactions in one year, online payments were largely in deficit. The two largest mobile payment operators, Ant and Tencent, have heavily subsidized businesses, using them as a gateway to win over users. To make money, they leveraged payment services to cross-sell products, including wealth management and credit loans.
“Ant’s growth potential will be limited by focusing back on its payment services,” said Chen Shujin, head of financial research at China at Jefferies Financial Group Inc. “On the continent, the online payments industry is saturated and Ant’s market share has practically reached its limit. ”
Bad dream
The worst scenario would be for Ant to give up its money, credit and insurance management businesses, paralyzing its operations in units that serve half a billion people.
Its wealth management business, which includes the Yu’ebao platform, which sells mutual funds and money market funds, accounted for 15% of revenue.
Credit technology, which includes Ant’s Huabei and Jiebei units, was the group’s biggest revenue driver, contributing 39% of the total in the first six months of this year. It made loans to some 500 million people.
This result would be supported by the idea that China’s leaders have been frustrated by the arrogance of technology billionaires and want to teach them a lesson by eliminating their business – even if it means short-term pain for the economy and markets.
China’s private sector has maintained a delicate relationship with the Communist Party for decades and has only recently been recognized as central to the nation’s future. Many commentators attributed the recent crackdown on fintech companies to remarks Ma made at a conference in October, when he denounced attempts to control the burgeoning field as short-sighted and outdated.
Among them, Alibaba, Ant and Tencent led a combined market capitalization of nearly $ 2 trillion in November, overtaking state giants like Bank of China Ltd. as the country’s most valuable companies.
The trio invested billions of dollars in hundreds of emerging mobile and internet companies, earning kingmaker status in the world’s largest smartphone and internet market by users.
“The Communist Party is the end of everything and everything in China. He controls everything ”, said Alex Capri, a Singapore-based researcher at the Hinrich Foundation. “There is nothing that the Chinese Communist Party does not control and anything that appears to be spinning out of its orbit will be pulled back very quickly,” he said, adding that “we can expect to see more of this.”