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Jack Ma and his companies Alibaba and Ant Group, have received massive regulatory blows from Chinese authorities since Ma criticized them in October last year.
Ever since Chinese billionaire Jack Ma gave a fateful speech late last year, Ma’s fate has turned for the worse. In the speech, a usually flamboyant Ma criticized Chinese regulators for stifling innovation. His bold and inflammatory words fell on ears that were quick to take offense. Ma could have hardly predicted the fallout that came later.
Not only was Ant Group’s historic US$35 billion IPO swiftly shut down, but Chinese regulators have been bringing down the hammer on Ma repeatedly ever since. Soon after the IPO was scuppered by new and tighter regulations, Jack Ma disappeared from the public eye until late January this year.
After the speech, it was not just Ant Group in trouble, but also Ma’s other company Alibaba, which owns a third of Ant Group. Ant Group started out as a payments service for Alibaba’s ecommerce platform Taobao. It was then spun off, and eventually expanded to provide investment and insurance products.
The People’s Bank of China (PBOC) and the China Banking and Insurance Regulatory Commission (CBIRC) quickly issued draft rules to rein in online lending platforms like Alipay. The draft stipulated that small online lenders will be required to provide at least 30% of any loan they fund in partnership with a bank.
It also set a minimum capital requirement of RMB5 billion (approximately $772 million) for online lenders. These requirements were further tightened and will come into effect in July 2022. According to Breakingviews, these new rules require Ant Group to hold an extra RMB87 billion in capital, based on its historical consumer loan volume.
The regulations aimed to provide more oversight and control to regulators over online lending platforms. Chinese regulators have since introduced a slew of moves that aim to stop the unprecedented growth of tech giants like Alibaba and inhibit their seemingly unlimited power.
Here’s a timeline of how it all unfolded for Jack Ma.
24 December 2020
Christmas Eve brought bad news for both of Jack Ma’s companies. China’s State Administration for Market Regulation (SAMR) officially announced the launch of a probe into Alibaba’s alleged monopolistic practices. The announcement came after SAMR released draft rules the previous month that defined anti-competitive behavior for the first time.
The primary issue under investigation was a practice that prevented Alibaba merchants from operating on rival platforms. Alibaba confirmed the investigation, and the tech giant’s shares tanked by over 8% in Hong Kong.
The same day, Ant Group received a notice to meet with regulators to discuss how the fintech company could operate in a market-oriented way.
26 December 2020
Ant Group’s meeting with the regulators leads to a proposal for a plan to “rectify” the company’s regulatory violations. According to the PBOC, Ant group lacked a sound governance structure, defied regulatory requirements, illegally engaged in arbitrage, excluded competitors using market advantage, and violated consumer rights.
The PBOC orders Ant Group to establish a financial holding company with sufficient capital, and return to its initial payments business model. It also asks the group to improve transparency around its transactions, obtain licenses for its credit businesses, protect user privacy, and restructure its credit, insurance, wealth management, and other financial businesses to meet regulatory requirements.
Following the meeting, Ant Group announces a “rectification workforce” to work on all regulatory and compliance requirements.
29 December 2020
Ant Group plans to put its financial operations into a holding company that could be regulated as a bank, according to a Bloomberg report. The idea is to put any business that would require a financial license into the holding company. This included Ant Group’s wealth management, consumer lending, insurance, and payments services.
The move could potentially thwart Ant Group’s growth and profitability, slashing the valuation of its non-payment businesses by as much as 75%, Bloomberg reported.
The proposal quells investor concerns about Ant Group’s non-payments services after the PBOC order asked Ant Group to return to its payments origin. Following the announcement of the new plan, Alibaba shares rise by 5.7% in Hong Kong.
3 February 2021
Ant Group reaches a deal with regulators to restructure the company. Under the agreement, Ant Group will become a financial holding company — it was actually valued as a technology company thus far. Technology companies typically have higher valuations than financial companies.
The restructuring plan calls for putting all of Ant Group’s businesses, including its technology services, into the holding company. This is in contrast to the company’s initial plan of only moving its financial services to the holding company.
Following the announcement, Alibaba shares rise by 3.5% in New York. Despite these gains, Alibaba’s Hong Kong shares are trading at 15% below their record highs in October 2020.
Ant Group is still trying to revive its IPO. Given the restructuring, it is uncertain if authorities will sign off on its listing again. Moreover, its valuation could dip as low as $108 billion from about $300 billion valuation pre-IPO, according to Bloomberg Intelligence analyst Francis Chan.
2 March 2021
Chinese authorities had previously asked Ant Group to submit the financial data of its customers. Ma had said that he would submit customer loan data of 500 million borrowers.
However, the PBOC and other regulators are not satisfied with the amount of data submitted. Ma cites the country’s privacy policies for the submission of insufficient data. Nevertheless, regulators demand more customer data from Ant Group.
10 April 2021
The antitrust probe launched into Alibaba last year concludes with regulators slapping a fine of $2.8 billion (RMB18.228 billion) on the tech giant. The investigation finds that Alibaba has been abusing its market position since 2015.
The fine is equivalent to about 4% of Alibaba’s domestic revenue in 2019. Despite the record fine amount, Alibaba’s Hong Kong shares close 6.5% higher on April 12. Investors are likely relieved since the fine could have been as high as 10% of Alibaba’s domestic revenue, which stood at over $69 billion in 2019.
The regulators further instruct Alibaba to ditch its ‘my way or the highway’ policy for merchants. In response, the company says that it will lower barriers to entry and business costs for operating on its platform.
12 April 2021
In a meeting, Chinese regulators order Ant Group to restructure, and also rectify anti-competitive practices in its payments businesses. As part of the restructuring, Ant Group agreed to set up a personal credit reporting company to prevent the abuse of customer data.
20 April 2021
Reuters reports that Ant Group is exploring ways for its founder Jack Ma to exit the company. The Wall Street Journalhad previously reported that Ma had offered to hand over parts of Ant Group to the Chinese government during a meeting in November last year. The move was a peace offering from Ma to Chinese authorities, but the offering was rejected.
According to the Reuters report, PBOC and CBIRC officials met with Ant Group and Ma separately between January and March to discuss the possibility of his exit. Ant Group has denied the claims, saying that Ma’s divestment was never a topic of discussion.
27 April 2021
The Wall Street Journal reports that China is now investigating Ant Group’s IPO approval process. The investigation, led by central government authorities, started early this year. It targets regulators who gave the Ant Group IPO a speedy thumbs-up, local officials who supported and advocated it, and big state firms that stood to gain from it. According to Reuters, Ma’s relationship with these high-level dignitaries is also under the spotlight.
What does the future hold?
Ma lost $11 billion in net worth within two months of the Ant Group debacle. According to a list published in March, Ma even lost his title of China’s richest man. Ma has kept a low profile since the IPO was scuppered, which is contradictory to his usual spotlight-loving track record.
Ma’s misfortunes with regulators may be fueled by political motive, according to a report published by Nikkei Asia last month. The report claims that Ant Group is being penalized for actions that were previously tolerated in China. It further claims that the company is under scrutiny because of the Chinese Communist Party’s new motivation — curbing market monopolies and preventing the disorderly expansion of capital.
With several influential business leaders jailed recently, Ma’s safety remains questionable at best, according to an unnamed source in the Nikkei Asia report. The billionaire tycoon is not allowed to leave China since late last year until Ant Group completes restructuring.
Last month, Bloomberg analyst Chan revised his forecast about Ant Group’s valuation. According to him, the valuation could fall to $29 billion in the worst-case scenario and withstand at $115 billion in the best-case scenario. The Wall Street Journal reported that U.S.-based asset manager Fidelity Investments halved the valuation of its Ant Group shares. According to regulatory findings, Fidelity valued Ant Group at $144 billion at the end of February.
Ant Group’s restructuring and the increased regulatory oversight over its operations are expected to significantly dent the financial giant’s growth prospects. Its consumer lending arm will suffer the worst owing to the increased regulatory and compliance requirements.
The fate of Jack Ma and his empire remains uncertain. With Alibaba already fined and Ant Group ordered to restructure, it remains to be seen if Ma and his companies will see the end of regulatory blows sooner than later.
Some analysts are optimistic, believing that the worst is over for Ma and that Ant’s restructuring will provide clarity and boost investor sentiment. One thing is certain, however — the crackdown shows the limits of Beijing’s tolerance of free enterprise, according to an ET article. It marks the end of China’s experiment in financial-market liberalization — a move that will impact all Chinese tech giants, as well as the country’s rank in the global technology race, the ET report said.
Different experts have weighed in on this topic. As Winston Ma, former Managing Director of sovereign wealth fund China Investment Corp, said last month, “In short, the age of “exponential growth in the wilderness” for internet finance – and all cyber barons in various sectors – is over.”
Image courtesy of Alibaba Group