Jack Ma should have kept his mouth shut.
The often flamboyant billionaire was reportedly warned by at least two people close to him to “soften” the tone of a now infamous October address in Shanghai, where China’s most recognizable tech tycoon chided the country’s regulatory apparatus for stifling growth and accused the banking sector of adopting a “pawnshop” mentality.
Beijing chafed at Ma’s remarks which, predictably, were viewed not as constructive criticism, but as insubordination. Two weeks later, the biggest IPO in history (Ant Group’s planned dual-listing in Shanghai and Hong Kong) was iced. The last minute intervention stunned investment bankers and brokers.
Since then, China has stepped up an anti-monopoly campaign aimed at the tech industry, while simultaneously working to overhaul regulations around a burgeoning fintech space that the Party worries may become unruly to the detriment of stability.
Ma went largely silent, while Alibaba bled some $200 billion in market value. According to sources who spoke to Bloomberg, he was advised to remain in the country.
The US-listed shares fell the most on record in the shortened Christmas Eve session last week. They now sit at the lowest since July.
On Sunday, all of this culminated in a statement from the PBoC, which last week called Ant in for more discussions.
“Since the establishment of Ant Group, it has played an innovative role in developing financial technology and improving the efficiency and inclusiveness of financial services,” the central bank said. “As a company with significant influence in the field of financial technology, Ant Group must consciously abide by national laws and regulations, integrate corporate development into the overall situation of national development, and earnestly assume corporate social responsibilities.”
The PBoC went on to say that henceforth, Beijing would “guide Ant Group to thoroughly implement the relevant spirit of the Party Central Committee and the State Council.”
That is highly amusing, even as it smacks of totalitarianism. Ma and his sprawling conglomerate need to get back on board with “the relevant spirit” — and right quick, by the way, lest they should encounter more operational difficulties.
As is often the case, the PBoC statement was framed as a Q&A. “What is the main content of the interview?,” the central bank asked, on your behalf.
The answer appears to be that China is angling for what I would describe as a kind of “soft” breakup.
Beijing assessed that Ant Group’s “governance mechanism is not sound.” The central bank also accused it of adopting an “indifferent” approach to the law and defying “regulatory compliance requirements.”
Worse, the PBoC said Ant engages in “illegal regulatory arbitrage” while excluding “business operators in the same industry” with the effect of “damaging the legitimate rights and interests of consumers.”
Ant will need to “rectify” this situation, Beijing said Sunday. Here are the new requirements, taken verbatim from the PBoC’s “rectification” roadmap:
- Return to the origins of payment [processing], improve transaction transparency, and strictly prohibit unfair competition.
- Operate personal credit investigation services in accordance with laws and regulations to protect personal data privacy
- Establish financial holding companies in accordance with the law, strictly implement regulatory requirements, and ensure sufficient capital and compliance with related transactions
- Improve corporate governance and strictly rectify financial activities such as illegal credit, insurance, and wealth management in accordance with the requirements of prudential supervision
- [Ensure] the securities fund business [is] carried out in accordance with the law, strengthen the governance of securities institutions, and carry out the asset securitization business in compliance
That is no small task. And Beijing isn’t in the mood to wait around. “Ant Group must fully realize the seriousness and necessity of rectification, meet the standard supervision requirements, and formulate [an] implementation timetable as soon as possible,” the central bank said Sunday, after multiple regulators met with company officials over the weekend.
Bloomberg called the PBoC’s guidance “a series of edicts [that] represent a serious threat to the expansion of Ma’s online finance empire.” The New York Times correctly noted that more stringent capital requirements “could crimp Ant’s bottom line.”
“Regulators in China have played give-and-take with Ant for years,” the Times‘swent on to say, taking readers on a trip down memory lane. “When the company created a money-market fund within Alipay that paid higher rates than bank deposits, the government forced the fund to shed risk and lower returns,” “After Ant began managing huge amounts of money in Alipay virtual wallets, the central bank made it park those funds in special accounts where they would earn minimal interest.”
Ant delivered a statement of its own. Needless to say, it was overtly obsequious to the point of being totally redundant.
“Under the regulators’ guidance, Ant Group will establish a rectification working group and fully implement requirements raised at the meeting to bring into line the operation and development of our financial-related businesses,” the company pledged, adding that it will “comply strictly with regulatory requirements.” In addition, the company promised that the financial burden of “the rectification process” wouldn’t be shouldered by consumers or financial institutions.
In other words, unlike so many corporate titans operating in capitalist systems, Ant will not be permitted to pass along regulatory costs to customers and business partners. Beijing simply won’t allow it. Or at least that’s my read. Ant will comply and the company will simply eat those costs.
Just in case anyone was confused about whether Ant’s statement was really just a fealty pledge, the company concluded by thanking the Party. “We appreciate financial regulators’ guidance and help,” the company said, characterizing what is sure to be an expensive and wholly onerous process as “an opportunity to strengthen the foundation for our business.”
Clearly, Ant’s growth prospects are now curtailed. The company will be lucky to escape a breakup. Bloomberg’s coverage noted that regulators “are weighing which businesses Ant should give up control of to contain the risks it poses to the economy [and] haven’t settled on whether to carve up its different lines of operation, split its online and offline services, or pursue a different path altogether.”
For Ma, this is lesson learned. Although some version of this was likely coming one way or another, his speech in October accelerated the process and sharpened Beijing’s focus.
It’s a hard-learned lesson, that’s for sure. But it shouldn’t have needed teaching. He challenged the Party. And he lost. The only question now is how much pain Xi intends to dole out.