- Ant Founder Jack Ma’s blunt criticism of financial regulators was the immediate cause of the IPO delay, but Ma’s speech only accelerated a regulatory clampdown that was already in progress.
- Regulators are also concerned that Ant’s vast trove of user data will enable it to steal market share from state-owned banks, securities brokerages, and asset managers.
- Tighter regulation of Ant is consistent with policymakers’ focus on controlling financial risks from shadow banking.
Ant Group, the fintech affiliate of Chinese online retailer Alibaba Group, will delay its record-breaking IPO after financial regulators summoned founder Jack Ma and Ant senior executives for an informal meeting on 2 November. The meeting followed a speech by Ma last week in which he criticized financial regulators for an outdated approach that stifles innovation.
Trigger for a crackdown
On a superficial level, the abrupt suspension of the IPO reflects Chinese regulators’ displeasure at Ma’s blunt criticism. Authorities clearly wanted to project their authority and cut Ma down to size. On the other hand, Ma’s speech probably only accelerated a regulatory clampdown that was already underway. The back-and-forth between Ant and Chinese regulators mirrors the dynamic in advanced economies. Around the world, fintech startups have sought to be treated as technology companies, rather than financial institutions – implying both lighter regulation and richer equity valuations – even as regulators have grown increasingly concerned about regulatory arbitrage and financial risk.
Tighter regulation of Ant is consistent with China’s broader policy campaign in recent years to control non-bank lending. So-called “shadow banking” drove the extraordinary rise in economy-wide Chinese debt in the decade following the 2008 financial crisis, since such lending faced less regulation than comparable loans from commercial banks. In late 2017, regulators began clamping down on loans from non-bank institutions like trust companies, securities brokerages, asset managers, and peer-to-peer lenders, but Ant continued to grow.
The regulatory environment for Ant shifted in September this year, when the People’s Bank of China finalized new regulations – first proposed in 2018 – covering so-called “financial holding companies.” These are defined as conglomerates whose subsidiaries collectively more than one financial business license. In China, business lines such as commercial banking, securities brokerage, asset management, and insurance are generally segregated, but some conglomerates control individual companies that operate in multiple areas. The new regulations impose higher capital requirements on financial holding companies, effectively increasing their operating costs and constraining their growth.
The Shanghai Stock Exchange announced the suspension of Ant’s IPO, citing the company’s recent meeting with regulators as evidence of a “significant change” in the regulatory environment for fintech that requires new disclosures by Ant. Following that announcement, Ant also delayed the Hong Kong portion of the IPO, though the Hong Kong Stock Exchange did not formally suspend the deal.
Who controls Big Data?
Over the last year, signs have mounted that Chinese regulators are concerned about Ant’s growing market power at the expense of state-owned commercial banks, who are still the dominant players in China’s financial system. In a world where Big Data has become the most valuable asset in many industries, Alipay allows Ant to accumulate data on trillions of annual payment transactions – data that previously flowed to the banks and/or to China UnionPay, the state-owned payments network that processes debit and credit card transactions.
This data provides Ant a powerful tool for identifying potential borrowers for consumer and small-business loans and for assessing the credit risk from such loans. China lacks a well-developed traditional credit-ratings infrastructure, but Ant’s enormous trove of data amounts to an in-house credit ratings agency. The funding for loans comes from commercial banks, allowing Ant to maintain a lean balance sheet.
The rise of Ant’s lending business threatens to further erode the competitiveness of commercial banks by increasing their reliance on Ant for customer acquisition, a service for which the banks pay a hefty fee. Regulators are reportedly considering a new rule that would require Ant to keep 30% of the value of the loans the company originates on its own balance sheet, rather than relying almost entirely on commercial bank funding. If implemented, this rule would force Ant to either hold more capital or slow the pace of new lending.
Regulators are similarly concerned about Ant’s increasing role in asset management, which has come at the expense of the mutual fund companies that create fund products and the commercial banks and securities brokerages that collect fees for distributing them. In October, Ant used the Alipay app to sell mutual funds that planned to invest in the company’s own IPO, bypassing traditional distribution channels. Regulators worried that Ant would soon extend this model to other fund products, enabling the company to win market share from state-owned incumbents.
The People’s Bank of China’s move to develop a blockchain-based digital currency also appears to be motivated by concerns that Ant – along with Tencent, which operates WeChat Pay – will monopolize Big Data. The central bank appears increasingly likely to insert digital renminbi into Alipay and WeChat Pay’s existing payments infrastructure. For ordinary users, this change would be imperceptible, but the shift would enable the PBoC – and possibly also state-owned commercial banks – to access transaction data that was previously available only to Ant.
Chinese regulators do not intend to deliver a fatal blow to Ant. The IPO is likely to proceed sometime in the next several months, and the company will continue to play a large role in China’s payments and consumer lending landscape. Regulators want Ant to continue to be a source of fintech innovation and to use Big Data to target loans to consumers and small businesses who are traditionally under-served by the state-owned banking system. At the same time, the suspension signals that top officials will not tolerate perceived insubordination from private tycoons. It also signals that regulators intend to protect incumbent financial institutions from disruption that would threaten their dominant role in China’s financial system.