China's central bank and financial regulators met with Ant Group executives about the company.
Big Tech is falling out of favor not just in the West, but in China as well. Recent regulatory crackdowns on Ant Group, Alibaba and Tencent show that China’s former tech darlings have run afoul of the all-powerful political and regulatory regime in China.
Published reports indicate that China’s central bank and banking, securities and foreign-exchange regulators summoned Ant Group executives this past weekend to discuss official concerns about the firm.
Reuters quoted central bank Vice Gov. Pan Gongsheng as saying that officials criticized Ant for poor corporate governance, defiance of regulatory demands, illegal regulatory arbitrage, the use of its market advantage to squeeze out competitors and harming consumers’ legal interests.
The news agency said that while Pan stopped short of calling for Ant’s breakup, officials want the firm to set up a separate holding company to ensure its capital adequacy and regulatory compliance. He also said Ant should secure a license to operate its personal credit business, offer more transparency about third-party payment transactions and not engage in unfair competition.
Reuters quoted Ant as saying in a statement that it would establish a “rectification” working group and fully implement the government’s requirements.
Will Chinese Authorities Force Ant To Restructure?
Howard Yu, LEGO professor of management and innovation and director of IMD’s signature program, Advanced Management Program (AMP), told PYMNTS CEO Karen Webster last month that regulators would soon force Ant to restructure to address such concerns.
“Any FinTech disruptor, when it becomes so big, represents systemic risk,” he told Webster.
For instance, Yu noted that Ant’s highly profitable microloan business involves assessing borrowers using algorithms rather than human loan officers, then repackaging and selling off loans rather than holding them. However, Yu believes the algorithms might not capture what would happen in a major economic downturn, assuming instead that China’s long expansion will continue indefinitely.
He said that’s exactly the combination of circumstances that led to the U.S. subprime mortgage industry’s collapse and the 2007-08 Great Recession. As such, Yu believes Ant could require a restructuring to defuse systemic risk.
“The current saga as it unfolded is consistent with the values of Chinese society,” he told Webster. “In the end, if Ant Group becomes the biggest financial institution in the world, from a policy maker's perspective, what does it serve beyond the social bragging?”
How Big Tech Fell Out Of Favor
Beijing’s tough stance comes some two months after Chinese billionaire Jack Ma, who helped found Internet powerhouses Alibaba and Ant Group, raised the Chinese government’s ire by slamming regulators in a public speech at a business summit.
Ma criticized China’s risk-averse regulators and the global financial system in general as suffering from a “disease of the elderly,” arguing that they were strangling innovation.
Shortly thereafter, the Shanghai Stock Exchange shut down Ant Group’s record-setting $37 billion initial public offering just two days before it was to take place. The move reportedly came at the insistence of top Chinese officials, possibly even President Xi himself. A day earlier, officials had summoned Ma for a face-to-face meeting, and have reportedly since told him not to leave China.
A Growing Crackdown
Meanwhile, the State Administration for Market Regulation last week brought in executives from Alibaba (which owns 33 percent of Ant Group) and five other Chinese Big Techs to read them the riot act. Other tech giants brought to the session included Chinese consumer internet giant Tencent Holdings, food-delivery app Meituan, eCommerce powerhouses JD.com and Pinduoduo and ride-hailing powerhouse Didi Chuxing Technology Co.
Regulators reportedly told the Big Techs that it would more closely monitor them going forward, warning against predatory pricing, misusing consumer data and selling fraudulent products.
Authorities last week also fined both Alibaba and Tencent 500,000 yuan (about $76,400) for failing to properly report previous acquisitions. The Wall Street Journal reported that while the fines were small, they represented the first time that authorities had ever enforced such rules against foreign-listed Chinese firms. The Journal quoted observers as saying the move put tech giants such as Alibaba on notice that they’re no longer immune from government oversight.
Chinese officials last month also issued draft rules aimed at preventing monopolistic behavior by internet firms. Additionally, the Chinese Politburo recently vowed to strengthen anti-monopoly efforts during 2021, reportedly promising to fight “disorderly capital expansion.”
Jon Jiang, a PhD student at Australia’s Queensland University of Technology who often writes for the South China Morning Post, argued in a scholarly article for the Jamestown Foundation that “Jack Ma’s good days have gone, at least for now.”
Jiang said some market watchers see the crackdown as “Beijing’s humbling of a powerful company and its outspoken leader, asserting the authority of the state above all.” He wrote that others see the moves as “a long-awaited regulatory crackdown, arguing that Ant functioned for too long as a quasi-bank under the guise of a technology company to dodge the scrutiny of financial regulations.”
Either way, Jiang wrote, “the era of regulatory arbitrage appears to have ended, with China’s economic leadership beginning to respond to the reality that [FinTechs] will shape the future of financial services.”
Beyond just reining in powerful businesspeople like Ma, the sudden crackdown could be aimed at legitimate fears of FinTechs’ growing role in China’s financial system despite limited oversight.
In a recent speech to a Singapore FinTech summit, Guo Shuqing, chairman of the China Banking Regulatory Commission, said authorities are “watching out for the ‘too big to fail’” financial firms.
For instance, he said that China’s micropayment market “is dominated by a few tech companies [that] have the feature of being key financial infrastructures with public interest at stake.”
Guo said it is “necessary to closely follow the spillover of those complex risks and take timely and targeted measures to prevent new systemic risks.”
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