Why China changed the rules of Jack Ma’s ant group

Years of loose regulatory oversight in China has helped billionaire Jack Ma’s Ant Group become the world’s most valuable financial giant, with businesses spanning payments, banking, wealth management and insurance. But a shift in rhetoric from the Chinese authorities – and new rules they suddenly imposed on its lucrative consumer lending business – signal that the once fertile landscape of the fintech industry has changed. The first victim was Ant’s $ 35 billion mega-list on the eve of his Shanghai and Hong Kong debuts.

1. What are the new rules?

This is actually a draft rule to regulate the country’s more than 200 online microlenders, which refers to companies that offer relatively small, unsecured loans through the internet, and are prohibited from accepting. deposits. The proposals include:

The draft rules were released on November 2 by the China Banking and Insurance Regulatory Commission and the People’s Bank of China. Public comments were left open until December 2.

The immediate trigger is unclear, as regulators have been considering such rules for at least a year. In September, they struck a blow at Ant and other companies with new license and capital requests and a new cap on the use of asset-backed securities to fund quick consumer loans. Then, at a high-profile conference in late October, Ma lambasted China’s financial system and questioned global regulatory models. He called traditional banks “pawn shops” because they demand collateral for loans instead of using “Big dataAnd other high-tech tools to assess credit risk like Ant does. “A good innovation is not afraid of regulation, but is afraid of outdated regulation,” he said. China should not “regulate the future with yesterday’s method”.

The Chinese Committee for Financial Stability and Development met on October 31. Vice Premier Liu He, confidant and key economic adviser to President Xi Jinping, said there that from this point on, fintech companies should be supervised and subject to the same regulatory requirements as traditional players. to guard against growing risks. A few opinion pieces from academics and state media regulators followed, criticizing some FinTech companies for charging exorbitant fees or failing to protect the privacy of customer data. Then, on November 2, Ma was summoned at a rare joint meeting with the country’s central bank and three other major financial regulators. Draft rules followed, and on November 3, the Shanghai Stock Exchange suspended Ant’s listing two days ahead of its scheduled debut, citing regulatory changes. Ant then pulled the one from Hong Kong.

4. What does this mean for Ant?

It will be a big blow. Ant’s CreditTech unit, which includes its two micro-lenders, is its main driver of revenue. Revenue jumped 59% to 29 billion yuan in the first six months of the year, contributing 40% of the group’s total. In the 12 months ending June 30, Ant has helped provide small unsecured loans to approximately 500 million people through microlenders: Huabei (Just Spend) and Jiebei (Just Lend). Of the roughly 1.7 trillion yuan in consumer loans it has taken out, only about 2% has been kept on its own balance sheet, with the rest being financed by third parties or packaged as securities and resold. The new minimum co-loan requirement of 30% would mean Ant would have to take out 520 billion yuan in loans alone, according to a Bernstein estimate. With a leverage ratio capped at 5 times for online microlenders, it will take a minimum of 104 billion in net assets, or three times its current level of 35.
billion yuan. If Ant’s IPO gets back on track, analysts are predicting a much lower valuation with multiples closer to banks, as regulatory risks show he is “thinner” than “tech”.

5. Are other companies affected?

Sure. There are 249 online micro-lenders in China and many of them have consumer lending activities similar to Ant, but on a much smaller scale. Other fintech giants such as JD.com and Tencent Holdings are also among the major players.

6. Is there a bigger problem?

The fintech industry has presented regulators with unprecedented challenges due to its huge customer base and growing role in China’s money flow and financial plumbing. While making financial services more convenient and accessible to hundreds of millions of users, they extend more credit to students and other customers with little income – or credit history – at a time when the Chinese household debt hits record highs. Guo Wuping, head of consumer protection at CBIRC, said in a recent comment that Ant’s Huabei service was similar to a credit card but with higher fees. (However, people flock because it’s convenient for online shopping and doesn’t require any credit checks.) The biggest concern, however, is that online lenders offer other banking services without meeting the same requirements. capital and leverage than those imposed on banks. If something goes bankrupt, it could undermine overall financial stability.

The big Chinese banks certainly welcome the rules. They compete with Ant for customers and continue to lose ground. China Merchants Bank Co., known as the king of retail banking, rose nearly 9% in the days after the rules were announced. Moody’s said the proposed rules would strengthen protections for individual borrowers. This is also a victory for President Xi Jinping and the Communist Party as they prioritize finances and politics stability. In their view, allowing Ant – a private company – to have too much influence over the financial system could ultimately undermine the party’s grip on power.

8. What do people say about investing in China?

For foreign investors, the Ant saga has raised new questions about the viability of Hong Kong and Shanghai as premier financial centers, and China’s commitment to the kind of transparency needed in modern capital markets. and open. This is especially the case after the party’s Central Committee signaled greater openness in a new five-year plan that included a timetable for moving forward with promises of greater access to foreigners and easing. controls on the yuan and capital flows.

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