Jack Ma’s finance giant faces a China clampdown

Bloomberg

There’s no other company on Earth quite like Ant Financial.
Spanning online payments, insurance, lending, credit scores, asset management and more, Jack Ma’s Chinese behemoth resembles a mashup of PayPal, Geico, Wells Fargo and Equifax — with a bit of BlackRock thrown in for good measure. Thanks to clever mobile apps and a burgeoning Chinese middle class, Ant oversees the world’s biggest money-market fund and handles more than $2.4 trillion of mobile payments every three months. Many of the company’s 870 million customers rely on it for nearly every aspect of their financial lives.
But Ant’s extraordinary reach may soon expose the company to a major challenge: Chinese policy makers, worried that Ant and other financial holding companies pose systemic risks to the nation’s $12.7 trillion economy, are drafting new regulations that could make it much harder for the companies to grow.
The rules will force Ant and some of its peers that straddle at least two financial industries to obtain licenses from China’s central bank and meet minimum capital requirements for the first time, according to people familiar with the matter, who asked not to be identified discussing private information. The companies’ ownership structures and inter-group transactions will also be restricted, the people said, adding that the rules need approval from China’s State Council and are subject to change.
Ant was among the biggest beneficiaries of a freewheeling era in Chinese financial regulation that saw tech-savvy startups transform how the nation’s 1.4 billion people spend, borrow and save. But China’s government is now shifting into risk-control mode as it tries to prevent a record buildup of corporate and consumer debt from sinking the economy.
Ant’s growing role in the country’s financial plumbing makes it an obvious target for authorities who’ve already shackled spendthrift acquirers and reined in the nation’s sprawling shadow-banking system.
“Regulators have been a bit slow in reacting to Ant’s meteoric rise, but the consensus now is that something must be done,” said Dong Ximiao, a senior researcher at Renmin University of China in Beijing. “Ant has become too big to fail. Any mishap could lead to market or even social disorder.’’
The prospect of stricter oversight comes at a particularly sensitive time for Ant. The company is in the process of finalising a $10 billion funding round and may soon embark on one of the most eagerly anticipated stock-market listings since Ma took his e-commerce giant, Alibaba Group Holding Ltd., public in New York four years ago. Ant is also grappling with growing competition from Tencent Holdings Ltd. — the social media behemoth that’s branching into financial services — and a more uncertain outlook for its international expansion after the collapse of a deal for America’s MoneyGram International Inc. in January.
Ant, which was spun off from Alibaba in 2011 and is formally known as Zhejiang Ant Small & Micro Financial Services Group, said in response to questions from Bloomberg News that its “principle has always been to work closely with regulators and support the healthy development of China’s financial sector.”
China Investment Corp., the $930 billion sovereign wealth fund that owns a stake in Ant, responded to questions by saying it’s not involved in the company’s management.
The People’s Bank of China didn’t respond to a faxed request for comment. While the central bank has never publicly detailed which businesses it considers financial holding companies, former PBOC Governor Zhou Xiaochuan said in March that regulators were considering new rules for the companies that may include minimum capital requirements. When asked by Bloomberg News in March how the government plans to regulate Ant, Yi Gang, who succeeded Zhou as PBOC governor seven weeks ago, said: “You will find out very soon.”
To be clear, there’s no indication that Ma or Ant have broken any rules or landed on Beijing’s blacklist.
While policy makers are right to consider tougher restrictions on the company, Ant “didn’t run afoul of the government,’’ said Oliver Rui, a finance professor at the China Europe International Business School in Shanghai. Judging by the $150 billion valuation under discussion in its upcoming funding round, Ant’s investors don’t seem particularly spooked. In fact, they have a fresh reason to be bullish after it emerged on Friday that Ant’s pretax profit jumped by an estimated 65 percent in the year ended March.
But that doesn’t mean the company will go unscathed.
While some of Ant’s units already fall under the purview of authorities including the central bank, the company isn’t regulated at a group level and discloses little about its finances to the public. The worry is that problems at Ant could go undetected and, in a worst-case scenario, put the stability of China’s financial system at risk. The company’s outsized presence in the lives of ordinary Chinese adds to the argument for stricter oversight.
Some of Ant’s business lines have already faced tighter restrictions in recent months. The company’s Yu’E Bao money-market fund, which has more customers than the US has people, put a cap on daily subscriptions in February after coming under pressure from the central bank to limit inflows. Two of Ant’s consumer lending units tripled their capital buffers in December after the PBOC rolled out tough new requirements for the industry.