Ant and AliPay aim to expand Alibaba’s crackdown

Chinese President Xi Jinping does have it for Jack Ma. It’s communism vs. capitalism.

Shares of Alibaba Group Holdings (BABA) traded in Hong Kong today, closing 8.0%, deepening a decline that began in late October. The stock has now fallen 29.5% since October 23, leaving it almost flat for that year and at its lowest level since June.

The company lost about $ 116 billion in market capitalization in the last two trading days. That’s after China announced last Thursday that it will launch an antitrust investigation into Alibaba, which runs China’s dominant e-commerce sites Taobao and Tmall Luxury.

In the latest ripple, Chinese regulators are trying to restructure and possibly break Alibaba’s fintech subsidiary, Ant Group, which runs the ubiquitous AliPay digital wallet application.

In a country where credit cards have not been commonly used outside of major cities, AliPay allows users to use their mobile phones to pay for virtually anything: food, taxis, train fares, movie tickets, mobile phone bill, insurance …

Chinese financial regulators are now examining the work of Ant Group. Their focus is on whether they have the necessary licenses and capital reserves to provide the types of financial services they provide.

Ant said on Sunday it would “greatly” improve its compliance by conducting a review of its business. The ants’ executives met on Saturday with officials from, well, almost any financial regulator involved: the Central Bank of China, the People’s Bank of China; China Banking and Insurance Regulatory Commission; China Securities Regulatory Commission; and the State Administration of Foreign Exchange Rates (SAFE).

Central Bank Deputy Chief Pan Gongsheng appealed to the official Xinhua news service to accuse Ant of “having a poor legal conscience, violating regulatory requirements, abusively acting for regulatory arbitrage, and capitalized on the market to exclude competitors and harm the legitimate rights of consumers. and interests. “

Financial regulators have identified “major problems” in Ant’s business operations and are asking him to set a timetable “as soon as possible” to address them.

Pan said Ant should “return to its original business as a payment service provider,” as well as increase transparency. He needs to improve the way he stores personal data and make individual credit reports, he said.

Looks like Ant will have to restructure. Ant will have to set up a financial holding company, Pan said, with proper supervision, sufficient capital and legal authorization.

Separated from the Ant issues, the State Administration for Market Regulation said on Thursday that it had launched an antitrust investigation into Alibaba. Ant initially only served as an escrow service for the two parties trading goods on Alibaba’s Taobao e-commerce site. The buyer parked the money with Ant, who then scattered it to the seller. However, this left Ant with huge temporary piles of money. This base was needed to build a wide range of financial offerings.

It was common for rivals Taobao and Alibaba, such as JD.com (JD) and Pinduoduo (PDD), to ask merchants to choose “one of two”, selling their goods on only one e-commerce platform, for fear of not be struck by serving the other. This is clearly anti-competitive and detrimental to consumer choice. The most successful Chinese startups also usually restrict investors from placing money in their rivals if they want to continue investing in spinoffs in that corporate group.

Fintech has already changed its name to Ant Group in Ant Financial to distance itself from its initial attempts to look like a financial one-stop shop. After Alibaba leader Ma, who has a fortune of $ 57.3 billion, is the richest man in China, he made public the financial industry and Chinese regulators – he said at a conference in Shanghai that banks Chinese states had a “pawn mentality” when it came to credit expansion – they took revenge.

It is clear that Communist Party officials are worried that Ant and Ma were too liberal with their credit. The subtext of the struggle is that Communist Party officials want to remind Ma and other private sector successes about who is really responsible.

Shortly after Ma’s speech in late October, which was attended by influential bankers and financial regulators, China’s Securities Regulatory Commission said it had called Ma, Ant’s chief executive Eric Jing and CEO. Ant, Simon Hu, for questioning. The CSRC – the equivalent of the US Securities and Exchange Commission – did not say what the talks were about, but Ant said in a statement that “views have been exchanged on the health and stability of the financial sector.”

Ant was then forced, on November 3, to withdraw its initial public offering from Shanghai and Shenzhen, which with 37 billion US dollars was to be the largest in global history. The cancellation came just two days before the shares began trading and after regulators and markets in both cities approved the offer. There is speculation that Chinese President Xi Jinping has intervened to prevent the IPO.

The examination is now deepening. Ant last week suspended its service that allowed customers to deposit cash at regional banks in China. This could violate the rules against operations across provincial borders.

The company has also reduced the credit limits of many users, which it has expanded to be able to shop. Pan, the central banker, said Ant was offering “illegal credit loans” and questioned his insurance and wealth management services.

AliPay’s rival, WeChat Pay, is led by Tencent Holdings (TCTZF) and may soon face similar pressures. Tencent shares fell 6.6% in Hong Kong on Monday, although they rose 38.2% in 2020 due to the company’s growing business in the field of smartphones and online video games.

Unlike Alibaba’s struggles, Chinese stock markets have generally flown. CIS 300 of the largest listed companies in Shanghai and Shenzhen is up 23.6% in 2020.

It is an impressive comeback after the center of Wuhan became the Chinese city where the Covid-19 pandemic first broke out. China’s economy is likely to grow 2.1% this year, according to Oxford Economics, leading to a rampant 7.8% growth in 2021.