Jack Ma’s Ant Group quickly became one of China’s 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 supplant.
Months after the company’s blockbuster initial public offering was shelved at the last minute — a move that appears to have been sparked by Ma’s criticism of Chinese regulators — several media outlets have reported that Ant has agreed with authorities to become a financial holding company.
Ant declined to comment on those reports earlier this month, and the details of any potential agreement were not immediately clear. The company did not respond this week to additional questions about any deal with authorities.
But the reports suggest that the Alibaba-affiliated company may now have to follow rules similar to those required of traditional Chinese banks — a move that could force it to scale down its aspirations to be a dominant force in the tech world.
The company is best known for its Alipay digital payments app, which boasts 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 business with assets worth about $635 billion under management.
While the company was largely able to grow unchecked over the past decade, the political winds in Beijing are 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 are looking for ways to rein them in.
“The Chinese government is moving to regulate these apps with a much heavier hand,” said Doug Fuller, an associate professor at the City University of Hong Kong who studies technological development in Asia. “The aim is not to kill these apps, but the days of unrestrained growth and hopes of displacing traditional banking some day are over.”
What it means to be a bank
Beijing’s tech crackdown has taken many forms over the past several months. Not only did regulators force Ant Group to call off its record-breaking IPO, they also launched an antitrust investigation into Alibaba (BABA), questioned executives at Tencent (TCEHY) and Pinduoduo (PDD), and floated new rules that could govern the operations at many tech firms.
While several loose ends remain, there are some clues as to what Ant’s ultimate fate may be, at least. 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 2.15 trillion yuan ($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, the country’s central bank.
Against that huge loan book, Ant held just 16 billion yuan ($2.5 billion) in authorized capital.
Beijing, meanwhile, mandates that “systemically important” banks, or those deemed too big to fail, have enough money to cover at least 11.5% 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 ratio. (Notably, China’s ratio is even stricter than that used by other countries that follow Basel.)
On Saturday, regulators announced even more new rules that could dampen Ant’s growth. Online lending companies like Ant will from next year be required to put up at least 30% of the funding for any loan they issue in partnership with a bank according to the China Banking and Insurance Regulatory Commission. Ant contributed just 2% in funding to the more than $260 billion in consumer loans they issued jointly with banks as of last June, according to stock exchange filings.
Ant will have “less flexibility and innovative space,” if it becomes a financial holding company, wrote Ji Shaofeng, the chairman of the China Small and Micro Credit Industry Research Association, in Caixin Global magazine last November after the IPO was pulled. He 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.
“For a tech company that needs constantly [to] innovate, such regulations will pose extremely big pressure,” he wrote.
Longstanding public tensions
This is exactly the kind of pressure that Ma, the co-founder of Ant and Alibaba, was worried about when he landed himself in hot water with regulators late last year.
“The Basel Accord is more like a club for the elderly,” Ma said during a speech in Shanghai last October, his last before Ant’s IPO was pulled and he largely retreated from public life.
“What it wants to solve is the problem of the aging financial system that has been in operation for decades,” Ma said. But while systems like Europe’s are complex, he called China’s financial system an “adolescent” that is better served by innovative tech firms that can bring banking to poor populations and small-time businesses that are otherwise locked out of traditional banks.
