Jack Ma, the most famous business leader in China’s history, has disappeared from public view for almost eight months. In eight months, a conservative estimate is about 70 billion U.S. dollars.
That is the optimistic view on how much Ma’s Ant Group Co. has plummeted in value since the Ma openly pushed back against China’s leadership. Within Ant, the financial technology giant Jack Ma spun off from Alibaba Group Holdings Co., Ltd., is actual cost is still being calculated. Followers of “Papa Ma”, China’s answer to Jeff Bezos, have been brought to their heels by higher power: Chinese President Xi Jinping and his economic right-hand man Liu He.
According to people familiar with the matter, a team from the country’s top financial regulator is now asking Ant Financial CEO Eric Jing and his employees to regularly update the progress of the state-ordered business reform. New measures must be reviewed by officials. A person who asked not to be named said that the authorities have discussed appointing a government representative among Ant Financial’s senior managers to keep a close eye on the company.
According to people familiar with the matter, a team of China’s top financial regulator now requires the CEO of Ant Financial and his employees to regularly update the progress of the state-ordered business reforms.
Therefore, it straddles China’s large technology companies, where the free-willed Internet era capitalism and its wealth and influence conflict with the goals and ambitions of the Chinese Communist Party. The “rectification” described by the regulator is in progress, and it has also affected the financial operations of Tencent Holdings, JD.com, Douyin’s parent company Bytedance, and ride-hailing giant Didi Chuxing. For years, officials in the United States and Europe have been thinking about how to deal with large technology companies with such powerful powers. China’s answer is to advocate control.
In the financial technology sector, this means forcing upstarts like Ant Financial to behave more like old-fashioned banks. This also means that the balance of power in the country’s huge and debt-laden financial industry will be redirected to state-owned banks that are closely related to the party line. Beijing says China’s large Internet and financial technology companies have abused market power. Xi Jinping hopes to control innovators without stifling innovation, and to reduce financial risks without reducing economic returns. The question is, can he?
Ant and their colleagues have suffered some heavy blows. Regulators have been working hard to check their influence, and it looks like profits will be much lower in the future. Bloomberg predicts that the online loans of hundreds of millions of Chinese, the biggest growth engine, will be reduced by 23% within five years, and the funds flowing into investment products sold on fintech platforms will also be reduced. The payment ecosystem will now be closely regulated. Liao Ming, the founding partner of Prospect Avenue Capital, which manages US$500 million in assets, said: “As Beijing reshapes its relationship with the technology giants, we are entering a period of major turbulence-stricter control measures are expected to be adopted. Beijing’s focus has shifted.”
The trouble started in October, when Jack Ma publicly criticized global financial regulators and traditional bankers. He said they were out of touch and stifled innovation. More than a week later, Ant IPO was put on hold. Since then, the authorities have issued new regulations on everything from consumer loans to leverage to online payment monopolies. Regulators and official media have used the public’s dissatisfaction with China’s super-rich to criticize these companies for putting the poor and young people into debt.
More than a dozen technology companies have been told that they may need to restructure their financial departments into entities that are more like banks and regulated by the People’s Bank of China. Everything is under scrutiny from how consumer data is collected and used to how loans are issued and to whom, as well as overseas listings and ownership structures.
Ant is but the first. Its most profitable business-working with banks to provide small online loans to shoppers-is now capped at less than 300 billion yuan (46.4 billion U.S. dollars), under a newly licensed unit. To make matters worse, the state-owned bank partners are withdrawing from the field of financial technology at the request of the regulator. “The dynamics of power have changed, and state entities will be more vigilant about financial technology activities,” said Joel Gallo, CEO of the Columbia China Alliance Business Consulting Company, a consulting firm in Guangzhou.
The greater pain is yet to come. Ant Financial and rival Tencent have been told to cut off the “improper links” that have long turned one billion users of its ubiquitous payment apps (Ant’s Alipay and Tencent’s WeChat Pay) to high-income services such as loans and fund management . Regulators have yet to make a ruling on how the two companies that dominate mobile payments can guide their application traffic and use the large amount of data they collect.
The People’s Bank of China is weighing new rules to curb the online payment monopoly, while trying to start a joint venture to take charge of the data collected by these platforms and share it with competitors. Zennon Kapron, managing director of Kapronasia, a consulting firm in Singapore, said: “The Chinese government has implemented too little and too late to prevent Alipay and Tencent’s payment business from dominating the industry.” “Although they are local champions, the Chinese government prefers a more balanced approach.”
The sudden change in fate is brewing dissatisfaction. Lion Niu, a director of Beijing-based recruitment company CGL, said that some Ant employees, including senior managers, are actively looking for other jobs because they are worried about the declining value of their stock options. After the former CEO Hu Jintao unexpectedly resigned in March, Jing promised employees that the company would eventually go public. But what the recent turmoil means for the company’s valuation is still unknown.
According to Bloomberg Information analyst Francis Chan, Ant Financial is valued at between 29 billion and 115 billion U.S. dollars based on the earnings multiples of traditional financial companies. This is far below the $320 billion expected last year. Early investors in Ant Financial were more optimistic. Fidelity Investments, which owns a 0.14% stake in Ant Financial, has halved its estimate from US$295 billion earlier to approximately US$144 billion at the end of February.Warburg Pincus holds 0.33% of the shares and its valuation is between 200 billion and 250 billion US dollars. Alibaba, which owns about a third of Ant Financial, has fallen nearly 30% since the beginning of November.
The stakes are high. In March of this year, Bloomberg News reported that Tencent would have to merge its financial business into a holding company supervised by the central bank, which caused Tencent to be surprised. Within a day, the market value has evaporated by about 37 billion U.S. dollars. Two months later, local media reported that the regulator had called for the overhaul.
According to a person familiar with the matter, JD Technology, China’s No. 2 e-commerce site by net income, is waiting for instructions from the authorities before making any attempt to push deeper into finance. JD.com was widely ridiculed after putting an advertisement last year showing that a low-income worker borrowed money to pay for airline upgrades. Some people called for boycotting customers. Representatives of Ant and Tencent declined to comment. JD.com, the People’s Bank of China and China’s banking regulator did not respond to requests for comment.
“The rules imposed on fintech companies have removed some of their invincibility,” Gallo said. At the same time, the big banks are taking advantage of this. Last year, they invested a record 31 billion U.S. dollars in the field of financial technology. The Industrial and Commercial Bank of China is the world’s largest bank by assets, and its expenditures have increased by 40%. ICBC employs 800 employees in the technical field, bringing the total number of employees in this field to 35,400. Its banking applications increasingly imitate Alipay, bundling tourism, entertainment and catering services together, providing a series of financial services to its 416 million users.
Since Ant Financial had its IPO suspended, the share price of China Merchants Bank, the leader in retail banking, has soared nearly 60%. Ant Financial was told to scale back what was once the world’s largest money market fund. At the same time, China Merchants Bank, headquartered in the Shenzhen Science and Technology Center, opened up investment products that were once exclusively used by the wealthy to mass market customers, with an investment amount as low as 100,000 yuan. Retail assets under its management reached a record 650 billion yuan in the first quarter, reaching 9.6 trillion yuan.
Traditional Chinese banks have long struggled to find customers without collateral or credit history. Platforms like Ant have helped revolutionize loans by processing massive amounts of new data from payment systems, social media, and other sources to assess credit. Even if regulators order 13 top platforms to control their financial operations, they recognize the key role that Fintech plays in improving efficiency and access and reducing transaction costs. “The purpose is not to kill them,” Bernstein analyst Kevin Kwek said of fintech companies.