What regulators describe as "rectification" is under way, and it's also affecting the finance operations of Tencent Holdings Ltd., JD.com Inc., TikTok owner ByteDance Ltd. and ride-hailing giant Didi Chuxing.
It's been eight months since Jack Ma, the most famous business executive China has ever produced, all but dropped from public view. Eight months and, by conservative estimates, some $70 billion.
That's the
optimistic view on how much Ma's Ant Group has plummeted in value since the
outspoken billionaire openly pushed back against Beijing—and Chinese
authorities promptly quashed Ant's plans for a blockbuster initial public
offering. Inside Ant, the financial-technology giant Ma spun out of Alibaba
Group, the real costs are still being tallied. Followers of “Daddy Ma,” China's
answer to Jeff Bezos, have been brought to heel by higher powers: China's
president, Xi Jinping, and his right-hand man on the economy, Liu He.
A team from
the nation's top financial regulators now demand regular updates from Ant Chief
Executive Officer Eric Jing and his staff on the progress of a state-ordered
business overhaul, according to people familiar with the matter. New
initiatives must be vetted by officials. And authorities have discussed
installing a government representative in Ant's senior executive ranks to keep
tabs on the company, says one of the people, who asked not to be identified
speaking on a sensitive issue.
So it goes
across big tech in China, where freewheeling, internet-age capitalism, and the
wealth and influence it brings, has collided with the aims and ambitions of the
Chinese Communist Party. What regulators describe as “rectification” is under
way, and it's also affecting the finance operations of Tencent, JD.com, TikTok
owner ByteDance, and ride-hailing giant Didi Chuxing. US and European officials
have been wondering for years what to do with the big tech companies that have
amassed so much power. China's answer is to assert control.
In fintech,
that means forcing upstarts like Ant to behave more like old-fashioned banks.
It also means tipping the balance of power in the nation's huge, debt-ridden
financial industry back toward well-connected state-owned banks that toe the
party line. Beijing says China's big Internet and fintech companies have abused
their market power. Xi wants to bridle innovators without strangling innovation
and reduce financial risks without diminishing economic rewards. The question
is, can he?
Ant and its
peers have taken some hard blows. Regulators have worked to check their
influence, and the future is looking a lot less profitable. Lending online to
hundreds of millions of Chinese, the biggest engine of growth, is forecast by
Bloomberg Intelligence to shrink 23 percent over five years, as will money flowing
to investment products sold by fintech platforms. The payments ecosystem will
now be closely policed. “We are entering a period of major upheaval as Beijing
reshapes its relationship with tech giants — expect tighter controls to stay
here long-term,” says Beijing-based Liao Ming, a founding partner of Prospect
Avenue Capital, which manages $500 million in assets. “Beijing's priorities
have shifted.”
The trouble
began in October, when Ma publicly lambasted global financial regulators and
conventional bankers. He said they were out of touch and stifled innovation. In
a little over a week, the Ant IPO was put on ice. Authorities have since issued
new rules on everything from consumer lending to leverage to monopolies in
online payments. Regulators and state media have tapped into strands of popular
resentment toward China's hyper-wealthy moguls, criticizing the companies for
miring the poor and the young in debt.
More than a
dozen technology companies have been told they may need to restructure their
financial divisions into entities that will be more like banks and supervised
by the People's Bank of China. Everything from how consumer data is collected and
used, to how loans get made, and to whom, is under scrutiny, as are overseas
listings and ownership structures.
First up is
Ant. Its most-lucrative business — extending small online loans to shoppers in
partnership with banks — is now capped at less than CNY 300 billion under a
newly licensed unit, from more than double that and growing a year ago,
Jefferies' Hong Kong-based analyst Shujin Chen estimates. Adding to the strain,
state banking partners are pulling back from fintech at the behest of
regulators. “The power dynamics have shifted in that state entities will be
ever-more vigilant of fintech activities,” says Joel Gallo, CEO of
Guangzhou-based consulting firm Columbia China League Business Advisory Co.
More pain
lies ahead. Ant and rival Tencent have been told to sever the “improper links”
that long steered a billion users of their ubiquitous payment apps — Ant's Alipay
and Tencent's WeChat Pay — toward higher-paying services such as loans and fund
management. Regulators have yet to rule on how the two companies, which
dominate mobile payments, can direct traffic on their apps and use the wealth
of data they gather.
And the
PBOC is weighing new rules for curbing monopolies in online payments, while at
the same time trying to launch a venture that would take charge of the data
those platforms collect and share it with rivals. “The Chinese government
implemented regulations too little, too late to prevent Alipay and Tencent's
payment business from dominating the industry,” says Singapore-based Zennon
Kapron, managing director of consulting firm Kapronasia. “Although they are
homegrown champions, the Chinese government prefers a more balanced market.”
The sudden
turn in fortunes is brewing discontent. A number of Ant employees, including
senior executives, are actively hunting for other jobs as they become concerned
about the dwindling value of their stock options, says Lion Niu, director at
Beijing-based recruitment company CGL. Jing, who took the reins after former
CEO Simon Hu unexpectedly resigned in March, has promised employees that the
company will eventually go public. But what the recent upheaval will mean for
the company's valuations is still unknown.
Earnings
multiples of traditional finance companies would value Ant somewhere between
$29 billion and $115 billion, according to Bloomberg Intelligence analyst
Francis Chan. That's well below the $320 billion that it was expected to fetch
last year. Ant's early investors are more positive. Fidelity Investments, which
owns 0.14 percent of Ant, has halved its estimate to about $144 billion at the
end of February from $295 billion earlier. Warburg Pincus, with a 0.33 percent
shareholding, has pegged it somewhere between $200 billion to $250 billion.
The stakes
are high. In March, Tencent plunged on a Bloomberg News report that it would
have to fold its financial business into a holding company, supervised by the
central bank. About $37 billion of market value was wiped out in a day. Two
months later, local media reported that regulators had called for the overhaul.
JD
Technology, an arm of JD.com, China's No. 2 e-commerce site by net income, is
waiting for clear instruction from the authorities before making any attempt to
push deeper into finance, according to a person familiar with the matter. JD
was widely ridiculed last year after it ran an ad showing a low-income worker borrowing
money to pay for an airline upgrade. Some called for a customer boycott.
Representatives for Ant and Tencent declined to comment, while JD Technology,
the PBOC and China's banking regulator didn't respond to requests for comment.
“The rules
foisted upon fintechs have taken off some of the luster of invincibility they
have enjoyed,” says Gallo. Meanwhile, the big banks are pressing their
advantage. Last year, they collectively invested a record $31 billion in
fintech. At Industrial & Commercial Bank of China Ltd., the world's largest
bank by assets, spending jumped 40 percent. ICBC hired 800 people in
technology, bringing its total workforce in that one area to 35,400. Its
banking app increasingly mimics Alipay, bundling travel, entertainment, and
dining options, with a host of financial services for its 416 million users.
Shares of
China Merchants Bank, the retail banking leader, have soared almost 60 percent
since Ant's IPO was suspended. Ant was told to shrink its money-market fund,
once the world's largest.
At the same
time, Merchants Bank, based in the tech hub of Shenzhen, has opened investment
products once reserved for the rich to mass-market clients with as little as
CNY 100,000 to invest. Its retail assets under management climbed by a record
of CNY 650 billion in the first quarter, to CNY 9.6 trillion
Traditional
banks in China have long struggled to size up customers who don't have
collateral or credit histories. Platforms like Ant helped revolutionize lending
by crunching reams of new data from their payment systems, social media, and
other sources to evaluate creditworthiness. Even when regulators ordered 13 top
platforms to rein in their finance operations, they acknowledged the crucial
role fintechs have played in improving efficiency and access and lowering
transactions costs. “The intent is not to kill them,” Bernstein analyst Kevin
Kwek says of the fintechs.
Ordinary
people in China are hungry for loans. Yang Mei operates a small beauty parlor
in the southwestern city of Chengdu. The 30-year-old got a CNY 5,000 loan via
Ant last September to help pay for various beauty products. The rate: CNY 185
for three months, the rough equivalent of a 14.8 percent annual rate, which she
calls “reasonable.” She hoped to get another loan to fund an expansion but put
those plans on hold after Ant was forced to restrict lending. She says she's
reluctant to borrow elsewhere because she trusts the Ant brand.
Li Lin, who
owns a food processing factory in Sichuan province that churns out dairy
products and hotpot sauce, says he's having a hard time getting loans from
state-owned banks. He says even local banks are stingy with small business
owners, who aren't considered prime clients. Li, 40, says he and fellow
entrepreneurs continue to use small online lenders that fly under the radar of
regulators and charge usurious rates pegged to the principal even after half
the loan is repaid.
“It's been
extremely hard for small companies to get financing from state banks, and loan
costs for us are very high,” says Li. “It makes conducting business very
challenging.” — Lulu Yilun Chen, Jun Luo, and Zheng Li, with Heng Xie and Coco
Liu
© Bloomberg
L.P
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