When Ant Group’s IPO was suspended in early November last year, a colorful narrative emerged that founder Jack Ma’s hard-hitting speech at the Shanghai Bund Conference on 24th October had upset Communist Party bosses who then scuppered his $35 billion IPO. Five months later, a less colorful truth has emerged amid a wider government push to regain control over China’s digital economy. China’s debt-ridden financial sector is dominated by state-owned banks which ensures unbridled access to credit for fellow SOEs at the expense of private enterprises and consumers.
On Wednesday, Reuters reported that Pony Ma, the founder of Chinese social media video games giant Tencent Holdings met with China’s antitrust watchdog officials this month to discuss compliance at his group.
The shadow banking industry deployed complex wealth management and trust products to address this unbanked market after the 2008 financial crisis. It continued to grow until 2017 when the People’s Bank of China (PBOC) started clamping down on a variety of business models including peer-to-peer lending companies. As many as 3,000 of these platform businesses shut shop or migrated to countries with booming mobile phone penetration rates such as Indonesia, Philippines, Vietnam, Thailand, and India seeking a play of regulatory arbitrage. Rather than boosting commercial bank deposits as hoped by the banking regulator, the exit of the shadow bankers gifted a vast opportunity for China’s mobile banking market which crossed $8 trillion worth of transactions in the last quarter of 2019. Alipay and WeChat Pay controlled 55% and 39% of this market.
What Changed During The Pandemic
Enter the Covid pandemic. As adoption of digital payments accelerated, the time was ripe for fast-tracking the central bank digital currency (Digital Yuan) project which had been incubated by PBOC for more than five years. In April, as most parts of China emerged out of lockdown, the PBOC okayed a string of pilot projects to launch the Digital Yuan. In parallel, the incumbent Ant Group was eyeing a mouth-watering IPO valuation of $315 billion which was more than twice its valuation of $150 billion at the end of 2018.
There was no doubt that Alipay’s growth would slow down as the Digital Yuan gained acceptability. The window for Ant’s investors to cash out at peak valuation was narrowing. The IPO would also raise $34.5 billion in fresh ammunition for the Ant Group which would be deployed to slow down the Digital Yuan roll-out. This is when the State decided to drop niceties of financial innovation and bring out its bazooka – Anti-Monopoly Law (AML). Targets were drawn not just from the fintech space but a wider fraternity that included e-commerce, video sharing, search and other platform models.
China’s AML regime which was earlier used against foreign players such as Microsoft (2014) and Qualcomm (2015) is now targeting its home-grown internet behemoths in quick succession for past misdeeds. Just four days after Ant Group’s IPO was suspended, China’s State Administration for Market Regulation (SAMR) released draft rules titled “Guidelines for Anti-Monopoly in the Platform Economy”.
In December , a fine of $76,500 was levied on Alibaba for AML violations relating to a transaction dating back to 2017 and an official antitrust investigation was launched against Ant Group. In the same month, JD.com, Vipshop and Tmall (Alibaba Group) were fined for manipulative pricing and ByteDance’s claim for $13.9 million against Tencent alleging monopolistic behaviour was accepted for hearing by a Beijing court. In March, the onslaught intensified when Tencent and Baidu were fined $77,000 each for investment transactions dating back to 2018 and 2014 respectively. Five platform companies backed by Meituan, Pinduoduo, Tencent, Alibaba and Didi Chuxing were also fined for improper pricing behaviour.
Deep Divide
Last Friday, two more developments revealed the deep contours of the face-off between State and Big Tech. In a dramatic move reminiscent of the Cultural revolution when self-criticism was extracted from elites during struggle sessions by the Red Guards, the Ant Group published self-discipline rules for its major business divisions - wealth management, insurance, consumer credit, SME credit and Credit rating. The move was publicized by Global Times as one that would “strengthen the protection of consumer rights and build a more responsible digital financial platform, amid tightened regulation”. The second development was the announcement of Ant’s CEO Simon Hu Xiaoming’s resignation.
Ant’s valuation is now pegged at a more sober $200 billion. Both Ant Group’s MYBank and Tencent’s WeBank have announced their official partnership with the PBOC’s Digital Yuan project. The PBOC has also partnered with central banks of Thailand, UAE and Hong Kong for international pilot projects of the Digital Yuan.
The 2022 Winter Olympics in Beijing is being touted as a soft deadline before which the Digital Yuan roll-out will be completed. China’s urge to dictate the fortunes of its technology giants is also coinciding with a global backlash which is pushing them to seek listings closer to home. Alibaba’s Megvii is slated to become the first major Chinese AI startup to be listed in Shanghai following in the footsteps of chipmaker SMIC while EV players Li Auto, Nio and XPeng list in Hong Kong. A less than invisible hand of the State in their fortunes can be expected in the future as the mandate of heaven over the Chinese internet is restored. So much for palace intrigue.
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