China reins in Jack Ma’s Ant Group with enforced revamp

by akoloy


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China has imposed a sweeping restructuring on Jack Ma’s Ant Group, the fintech conglomerate whose file $37 billion IPO was derailed by regulators in November, underscoring Beijing’s dedication to rein in its web giants.

The overhaul, which has been within the works for a number of months, consists of Ant turning right into a monetary holding agency, a transfer anticipated to curb its profitability and valuation.

It comes two days after e-commerce large Alibaba Group Holding Ltd, of which Ant is an affiliate, was hit with a file $2.75 billion antitrust penalty as China tightens controls on the “platform economy.”

KUNJAL GALA, EMERGING MARKETS PORTFOLIO MANAGER, FEDERATED HERMES

“The recent fine (for monopolistic behaviors) and Ant converting into a financial holding company reduces the regulatory overhang for Alibaba.

“The focus now shifts to the near term fundamentals and long term outlook. The key questions are: Can Alibaba outgrow the industry? Possibly not. Can Alibaba maintain its margins in the near term? Possibly not. Does this mean that the future for Alibaba is negative? Probably not.

“Alibaba will have to invest in its core commerce business to protect its market share and invest in other businesses for new growth drivers. It is possible that Alibaba takes a prudent approach to areas where it has struggled in the past (such as community group buying) and limits the quantum of investments.

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“In addition, margins in its cloud and logistics businesses are likely to improve going forward. Investment in businesses will impact the earnings near term. However, the long term prospects for Alibaba to compound earnings remains intact.”

“It is difficult to speculate the timing when the (Ant) IPO happens. However, it is likely that the management will wait for the regulatory clouds to completely dissipate and the new operating structure stabilize prior to the IPO. Investors might wait to see the impact of regulations on growth and returns before developing an interest in the IPO.”

KIM FORREST, CHIEF INVESTMENT OFFICER, BOKEH CAPITAL PARTNERS IN PITTSBURGH

“It looks like Jack Ma has gone a long way in repairing his relationship with the financial regulators in China. Ant Financial looks like they are going to file to become a supervised bank. It goes a long way in repairing the relationship with China and specifically with Xi.

“Even though Alibaba has gotten a fine placed against it, it’s in the past. Investors are looking to the future. Ant Financial may not grow quite as aggressively as it might have as a standalone entity or a nonregulated entity, it still is going to be able to allow growth in Ant Financial and thus, Alibaba.

“Beijing has come after a lot of industries and they certainly wield their power but it looks like investors are willing to overlook that … I like to stay away from regulation in the stock picks I make. But a lot of people look at growth potential and will choose to overlook, what I consider, huge risk, which is the material nature of Chinese policy.”

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NAN LI, ASSOCIATE PROFESSOR OF FINANCE, JIAOTONG UNIVERSITY, SHANGHAI

“The regulatory talk on April 12, 2021, is not a surprise at all to me. The nature of fintech is to apply information technology to improve the efficiency of financial intermediation, whose fundamental special role in the economy is to channel the fund from net savers (households) to net users (corporations).

“The financial intermediation, as a ‘delegated monitor’, helps to reduce the information asymmetry between net savers and net users of fund and monitoring costs through the economy of scale in collecting and processing information and diversification of risk.

“To diversify and enjoy the economics of scale, the FIs (financial intermediaries) need to get big. Hence, financial regulation is necessary to monitor the monitor so that the FIs do not take advantage of households and corporations based on their sheer size.

“Moreover, appropriate regulation is needed to separate different functions of the FIs to refrain from the over-risk-taking behavior of FIs that may arise due to conflict of interests and moral hazard.

“This is why the payment services should be separated from the credit services (Huabei and Jiebei). This is also why the adequate capital ratio is imposed on any financial institution, including Ant Group.

“This is also why the data of consumers and producers collected from payment services and clearing houses should be under the oversight of the central bank instead of kept in the hands of private parties.”

DONG XIMIAO, CHIEF ANALYST AT ZHONGGUANCUN INTERNET FINANCE INSTITUTE

“The restructuring plan is stricter than expected, it means that Ant would need at least 200 billion yuan in registered capital to comply with the capital adequacy rule for financial holdings company.”

“There’s less uncertainty now as the restructuring plan finally lands, but we still need to wait and see how Ant implement all those requirements during the process.” (Reporting by Cheng Leng, Josh Horwitz and Medha Singh. Editing by Jane Merriman and Carmel Crimmins)

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In-depth reporting on the innovation economic system from The Logic, delivered to you in partnership with the Financial Post.

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