Why China Changed the Rules on Jack Ma’s Ant Group

(Bloomberg) -- Years of loose regulatory oversight in China 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 turnabout in rhetoric from Chinese authorities -- and new rules they slapped suddenly on its lucrative consumer-loan business -- signal the once-fertile landscape for the fintech industry has changed. The first casualty was Ant’s $35 billion mega-listing on the eve of its debut in Shanghai and Hong Kong.

1. What are the new rules?

They’re actually draft rules to regulate the nation’s more than 200 online microlenders, which refers to companies that offer relatively small, unsecured loans via the internet, and are banned from accepting deposits. The proposals include:

• When they jointly offer loans with banks, the online firm must provide at least 30% of the funding itself (instead of shifting practically all of them to the bank or selling them to third parties, as Ant has been doing).
• Loans to an individual would be capped at 300,000 yuan (about $45,000), or no more than a third of the borrower’s average income in the past three years. For corporates, each client’s lending cap is set at 1 million yuan.
• Online microlenders will be banned from operating outside their provincial base unless they receive special approval from the CBIRC and have 5 billion yuan of minimum registered capital. Such permission, if granted, needs to be renewed every three years.
• A shareholder cannot control more than one microlender operating nationally.

The draft rules were published Nov. 2 by the China Banking and Insurance Regulatory Commission and the People’s Bank of China. Public feedback was left open until Dec. 2.

2. What prompted it?

The immediate trigger is unclear, as regulators have been considering such rules for at least a year. In September they dealt blows to Ant and other companies with new licensing and capital demands 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 blasted China’s financial system and questioned global regulatory models. He called traditional banks “pawn shops” because they require collateral for loans instead of using “big data” and other high-tech tools to assess credit risk like Ant does. “Good innovation is not afraid of regulation, but is afraid of outdated regulation,” he said. China shouldn’t “regulate the future with the method from yesterday.”

3. And then?

China’s Financial Stability and Development Committee met on Oct 31. Vice Premier Liu He, a confidante of and key economic adviser to President Xi Jinping, said there that from then on, fintech firms must be supervised and subjected to the same regulatory requirements as traditional players to guard against growing risks. A few op-eds from scholars and regulators on state media followed, criticizing some fintech firms for charging exorbitant fees or failing to protect client data privacy. Then on Nov. 2, Ma was summoned to a rare joint meeting with the country’s central bank and three other top financial regulators. The draft rules followed, and on Nov. 3, the Shanghai exchange suspended Ant’s listing two days before its scheduled debut, citing the regulatory changes. Ant then pulled the Hong Kong one.

4. What will it mean for Ant?

It’ll be a big blow. Ant’s CreditTech unit, which includes its two microlenders, is its biggest earnings driver. Revenue jumped 59% to 29 billion yuan in the first six months of the year, contributing 40% to the group’s total. In the 12 months ending June 30, Ant helped provide small, unsecured loans to about 500 million people through the microlenders: Huabei (Just Spend) and Jiebei (Just Lend). Out of the about 1.7 trillion yuan in consumer loans it has underwritten, only about 2% were kept on its own balance sheet, with the rest funded by third parties or packaged as securities and sold on. The new 30% minimum co-lending requirement would mean Ant needs to underwrite 520 billion yuan of loans on its own, according to an estimate by Bernstein. With the leverage ratio capped at 5 times for online microlenders, a minimum of 104 billion of net assets will be required, or three times its current level of 35
billion yuan. If the Ant IPO gets back on track, analysts are predicting a much lower valuation with multiples closer to banks, as the regulatory risks show it’s more “fin” than “tech.”

5. Are other companies affected?

Sure. There are 249 online micro lenders in China and many of them are conducting similar consumer lending businesses just like Ant though to a much smaller scale. Other fintech giants such JD.com and Tencent Holdings are also among major players.

6. Is there a bigger problem?

The fintech industry has presented regulators with unprecedented challenges because of its huge client base and growing role in China’s money flows and financial plumbing. While they make financial services more convenient and accessible to hundreds of millions of users, they are pushing more credit to college students and other customers with little income -- or credit history -- at a time when China’s household leverage is climbing to record. Guo Wuping, head of consumer protection at the CBIRC, said in a recent commentary that Ant’s Huabei service was similar to a credit card but with higher charges. (People flock to it, however, because it’s convenient for online shopping and requires no credit check.) The biggest worry, however, is that the online lenders are offering other banking services without meeting the same capital and leverage requirements as imposed on banks. If something went bust, it could undermine overall financial stability.

7. Who benefits?

Big Chinese banks certainly welcome the rules. They have been vying with Ant for customers and keep losing ground. China Merchants Bank Co., known as the king of retail banking, rallied almost 9% in the days after the rules were announced. Moody’s said the proposed rules would strengthen protections for individual borrowers. It’s also a win for President Xi Jinping and the Communist Party as they prioritize financial and political stability. In their view, allowing Ant -- a private company -- to gain too much sway over the financial system could ultimately undermine the party’s grip on power.

8. What does it say about investing in China?

For foreign investors, the Ant saga has raised new questions about the viability of Hong Kong and Shanghai as premium financial centers, and China’s commitment to the kind of transparency needed in modern, open capital markets. That’s particularly so after the party’s Central Committee signaled greater openness in a new five-year plan that included a time-line for moving forward on promises of greater foreign access and relaxing controls over the yuan and capital flows.

The Reference Shelf:

• More QuickTakes on China’s market meddling, its financial market opening and its yuan internationalization and digital currency plans, as well as Jack Ma and Alibaba.
• Ant Group by the numbers.
• Bloomberg Opinion’s Shuli Ren weighs in on Ma’s blunt words and China’s shock response.
• Bloomberg News takes a look inside the unraveling of the Ant IPO, and at what more China has in store for Ant.
• The Financial Times’s take on the reasons for Beijing’s crackdown.

©2020 Bloomberg L.P.

With assistance from Bloomberg