Lucy Peng Must Bend With the Wind to Get Ant Financial Its Break

(Bloomberg Gadfly) -- A large tree draws strong winds, a Chinese saying goes. Lucy Peng will need a broad back if she is to withstand the regulatory gales buffeting Ant Financial as it prepares for an initial public offering.

The executive chair of Alibaba Group Holding Ltd.'s fintech arm is negotiating an array of evolving rules spanning areas as diverse as payments systems, money management and micro-lending.

China's biggest fintech company is best known for its Alipay system, but as Peng noted in her first interview with international media in December 2016: "Payments is just the tip of the iceberg. What's big is under the water." 

Ant is also a money manager, a loan originator, and a liquidity provider to China's burgeoning middle class. It controls the world's largest money markets fund, Yu'E Bao, which boasted more than 1.5 trillion yuan ($228 billion) of assets as of September; offers consumer loans to millions of users on Alibaba's e-commerce platforms; and has an online banking license. Once the People's Bank of China becomes comfortable with the concept of conducting know-your-customer due diligence electronically, Ant will be able to start taking household deposits, too.

Money is rolling in fast. Ant is expected to earn more than 20 billion yuan in operating profit this year, at a 29 percent margin, according to Bernstein Research. As of the latest quarter, the company was earning more than most regional banks in China.

Lucy Peng Must Bend With the Wind to Get Ant Financial Its Break

The Alibaba affiliate also benefits from diversified revenue sources, receiving about half from payments, and 20 percent each from consumer financing and insurance distribution.

Lucy Peng Must Bend With the Wind to Get Ant Financial Its Break

With success comes scrutiny. China's government has been happy to let new fintech businesses flourish, until they become big enough to pose systemic risks. Then, various regulations from the C-suites of the central bank or the China Banking Regulatory Commission come crashing down.

Already, the PBoC is tightening the screws on an online third-party payments industry that's expected to process 200 trillion yuan of transactions next year, according to iResearch data. Ant has about 40 percent of the market, followed by Tencent Holdings Ltd. with 30 percent. 

By the end of 2016, Ant Financial held almost 500 billion yuan of client money in escrow, on which it earns substantial interest income. But earlier this year, the PBoC mandated that all third-party payment platforms must deposit 20 percent of such funds as noninterest-earning reserves at designated banks.

If the central bank tightens further, Ant's interest income -- estimated at 17 percent of current revenue -- could drop all the way to zero.

The latest regulatory gust, against micro-lending, could deal another heavy blow to Ant's bottom line. After Alibaba-backed Qudian Inc. had a splashy IPO in October, authorities took notice of how "predatory" loans could threaten social harmony. Earlier this month, the PBoC and banking regulator suspended online cash loans not meant for specific purposes.

Ant Financial was quick to throw Qudian under the bus, capping interest rates charged by third-party lenders on its site at 24 percent. 

The fintech company's own lending operations are threatened by tightening controls on the asset-backed securities market. Currently, Ant operates an asset-light model, packaging and selling loans to institutional investors such as banks. Chongqing Ant Business Micro Credit Co., which hosts the company's cash loan operation, Jiebei, has already issued more than 100 billion yuan in asset-backed securities, data compiled by Bloomberg show.

New regulations may force Ant to change this business model drastically. Regulators say they will require lenders to hold capital against loans that have been packaged into asset-backed securities. Thus, Jiebei, licensed in Chongqing, won't be able to issue ABS exceeding 2.3 times its total capital, which stood at only 3.8 billion yuan as of 2016. Indeed, Ant in mid-December raised the Jiebei unit's registered capital to 12 billion yuan.

That threatens a lucrative cash cow. In the first nine months, Jiebei had 5.3 billion yuan of operating profit on 6.9 billion yuan in sales, a margin of 77 percent, according to news website Jiemian.

Lucy Peng Must Bend With the Wind to Get Ant Financial Its Break

Of course, Ant is cash-rich and could always inject funds into Jiebei to beef up its balance sheet, but just as happened with its payments business, consumer financing will become less profitable.

The whirlwind of regulatory changes mean Ant Financial is most unlikely to be ready for an IPO next year.

Peng, a co-founder of Alibaba alongside Jack Ma, stands in contrast to the company's billionaire chairman, who's danced to Michael Jackson tunes in front of employees and even appeared in his own kung fu movie. A soft-spoken former economics teacher, Peng is comparatively low-profile and media-shy. 

That may be just as well, considering the Ant chair's delicate task of negotiating the path ahead with China's financial regulators. Peng may need all her discreet diplomatic skills in the coming year.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

To contact the author of this story: Shuli Ren in Hong Kong at

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