CHINA: Ant group crackdown unlikely to extend to other private sector firms

Following the suspension of Ant's USD 35bn IPO in November, subsequent regulatory actions have clarified the nature of regulators' concerns about Alibaba/Ant. These actions suggest that the crackdown is primarily a response to specific concerns about a few large internet companies, rather than a broader crackdown on private entrepreneurs. So long as private companies operate within broad boundaries defined by the party's political and policy objectives, they will maintain significant freedom to pursue innovation and profits. Anti-competitive behavior As previously noted, Jack Ma's speech in late October criticizing China's financial regulators for stifling innovation accelerated a crackdown on Alibaba/Ant that was already underway. That note highlighted regulators' concerns about Ant and rival Tencent's ability to leverage their vast trove of user data to dominate industries from consumer lending to insurance to asset management. Since then, regulators have further elaborated their concerns about Alibaba/Ant and the changes the company will be forced to adopt. The first concern is Alibaba's practice of forcing merchants to sell exclusively on Alibaba-affiliated platforms, while foregoing rival platforms like Tencent's WeChat. In late December, China's anti-monopoly regulator announced an investigation into Alibaba's use of this practice, known as "choose one of two." That announcement came a week after China's most important annual economic policy meeting, the Central Economic Work Conference, listed "strengthening antimonopoly and preventing the disorderly expansion of capital" as one of eight key priorities for 2021. The second main concern is Ant's business model for consumer and small-business lending. Ant's user data makes these loans possible by enabling more accurate credit risk assessments and more targeted customer identification than traditional financial institutions can achieve. Our previous note discussed how regulators were uncomfortable with banks' increasing reliance on Ant for customer acquisition and credit risk assessment. In a meeting with Ant executives on 24 December, the central bank instructed Ant to "operate the personal credit reporting business on a licensed basis." This statement suggests that Ant will be required to sell credit assessments to other lenders as a standalone business, rather than leveraging proprietary credit data to build its own lending business. Regulators are also reportedly considering forcing Ant to divest from equity investments in dozens of companies. Though not confirmed, forced divestment would be consistent with the central bank's demand that Ant "return to its origins in payment services." High-interest loans Regulators are also concerned about the high interest rates on Ant's consumer loans. Ant's IPO prospectus revealed that consumer lending is Ant's fastest-growing business, far outpacing growth from digital payments. A business model based on usurious loans to low-income customers is inconsistent with the Communist Party's ostensible commitment to socialist values. Regulators also disliked Ant's lack of "skin in the game": while Ant collects high fees for helping banks market loans to consumers, banks provide most of the funding and bear the corresponding credit risk. Regulators are requiring Ant to establish a financial holding company that will be subject to capital requirements. Ant is reportedly planning to transfer its lucrative lending business into the holding company. The combination of higher capital requirements and higher "skin in the game" ratios will likely slow the pace of new consumer and small-business lending. Risks for the private sector are low There is little evidence that the government's recent actions against Alibaba/Ant are motivated by general hostility to the private sector, rather than specific concerns about a few dominant internet and fintech companies. The government's treatment of a handful of privately-owned giants like Alibaba/Ant and Tencent has limited applicability to the broad swathe of less powerful private groups. Moreover, despite rumors that Ant could be nationalized, this possibility is extremely unlikely, since nationalization is not required for the government to force Ant to adopt the desired changes. Similarly, no evidence has emerged to substantiate rumors that Ma has been arrested or detained. In general, the Communist Party expects privately-owned companies to operate under business models that are broadly consistent with the party's key political and policy objectives. Within this broad boundary, however, private companies in China will maintain the freedom to innovate and pursue profits. Private companies account for around 60% of Chinese GDP and 80% of urban employment, and the leadership has no intention to kill this golden goose.

January 27, 2021

Asia, Ant, editorial

CHINA: Ant group crackdown unlikely to extend to other private sector firms

BY Gabriel Wildau

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