Chinese billionaire Jack Ma’s Ant Group swiftly became one of the most powerful companies, and its plans for bridging the worlds of tech and finance were growing ever more ambitious by the day.
Now it appears to be turning into the kind of highly regulated Chinese bank that it hoped to replace. Months after the company’s blockbuster initial public offering (IPO) was shelvedat the last minute, a move that appears to have been sparked by Mr. Ma’s criticism of Chinese regulators, several media outlets have reported that Ant has agreed with authorities to become a financial holding company.
The reports suggest that the Alibaba-affiliated company may now have to follow rules similar to those required of traditional Chinese banks which is a move that could force it to scale down its ambitions to be a dominant force in the world of tech.
The company is best known for its Alipay digital payments app, which boasts of more than 700 million active users every month. It also has massive interests in online investing, insurance and consumer lending, which have helped it grow into a business with assets worth about $635 billion under management.
While the company was largely able to grow unchecked over the past decade, the political situations in China are fast-changing. Authorities are growing increasingly mindful of how much influence Ant and its peers have on the country’s financial system. Ant, for example, now commands more than half of the mobile payments market in China and the authorities are looking for ways to control them.
New regulations
Though the complete picture is yet to be clear, there are some clues as to what Ant’s ultimate fate may be. The People’s Bank of China last September outlined new measures for financial holding companies that required them to hold “adequate capital” matching the amount of assets they have, among other measures.
If Ant is now classified as one of those companies, that could mean it will either have to significantly increase the amount of cash it holds in reserve, or otherwise slash the size of its consumer lending business.
Even though the details of Ant’s reported agreement have not yet been confirmed, it’s easy to see why these new rules might be a problem.
Ant held about $333 billion worth of consumer and small business loans as of last June, according to its IPO prospectus. By comparison, more than 4,000 commercial banks in China held just six times as much in outstanding loans at the time, according to data from the People’s Bank of China. Against that huge loan book, Ant held just $2.5 billion in authorized capital.
China, meanwhile, mandates that “systemically important” banks, or those deemed too big to fail, have enough money to cover at least 11.5 percent of their risk-weighted assets, a rule it adapted from a widely used international banking guideline called the Basel Accord. Ant’s balance sheet falls far short of that number too.
Exercising control
Ant will have “less flexibility and innovative space,” if it becomes a financial holding company, said experts. They added that the large amounts of consumer data that Ant has collected through its digital payments services could also now fall under the watchful eye of regulators, potentially presenting further challenges.
While the Shanghai Stock Exchange did not clarify about the reason for pulling the IPO at the time, the government’s response since indicates that its decision was about exercising authority and control.
Economic concern
Beijing’s calculated crackdown on tech is rooted in economic concern just as much as exercising control. Authorities have long been worried about whether the influence that tech firms have over the financial sector makes that industry vulnerable to structural risks. If any of the major players failed for some reason, that could wreak havoc on China’s economy.
But it’s also a tricky balancing act. While Chinese President Xi Jinping has long favored state-owned firms over private ones like Alibaba and Ant, analysts point out that those state companies are not nearly as capable at driving productivity and innovation as their publicly owned counterparts.
That means China will likely remain careful “not to kill the goose that lays the golden eggs,” said analysts who research financial tech innovation in China.
“There is widespread recognition of the importance of the super apps for China’s innovation ecosystem, hopes for international influence and status, and its economy. If China wants to compete with the West, the country “has to pursue industrial and technology policies in a more efficient manner,” they added.
Thank you very much for choosing GCC Business News to be an important part of your professional life. You will receive a confirmation e-mail. Please check SPAM or UPDATES folder
