Alibaba, Ant Group, and China’s Ultimate Power Play

As the scuffle between Ant Group and the Chinese government continues, the real intent of the antitrust probe is beginning to come to light. On Sunday, China’s central bank said it had asked Ant Group Co Ltd to shake up its lending and other consumer finance operations.

The development is coming at the heels of suspension of Ant’s $37 billion mega IPO scheduled for Shanghai and Hong Kong markets in November.

Regulators have been looking into the affairs of Alibaba’s Jack Ma, who heads a conglomerate of online technologies that include Ant. Ma owns one-third stake in Ant Group which has become a target in the latest Chinese attempt to regulate its online industry.

Ma became critical of many regulatory measures in China, especially the Basel Accord, a series of international regulations that require banks to hold a certain amount of capital, as outmoded for the modern era. Part of his complaints is about the inadequacies of the Chinese lending institutions.

He accused the institutions of having a “pawnship” mentality of using collateral instead of advanced credit ratings and watchdogs of not knowing the difference between regulation and supervision.

The criticism has sparked undue interest not only in Ma’s businesses, but other key investments currently commanding immense value, in some cases, above state-owned companies, including the central bank.

Regulators said Ant should rectify financial regulatory violations it has been accused of; in its subsidiaries that include credit, insurance and wealth management business, and overhaul its credit rating business to protect personal information.

The development has not only shattered the expectations of investors, it has also created future uncertainties for the shares of Ant. The company increased its buyback plan from $6 billion to $10 billion in effort to ease concerns of investors. The buyback program will be effective for two years through the end of 2022, but it failed to hold off the concerns of investors.

As a result, Alibaba’s shares slumped 9% to their lowest since June on Monday, knocking almost $116 billion off the tech giant’s Hong Kong-listed shares. That’s after its US stock had nosedived more than 15% last week Thursday, following the news that China has launched antitrust investigations into Alibaba’s chain of businesses, particularly the finance sector.

The company has lost more than $200 billion in market value since November, when Ant’s initial public offering was called off.

The concern of investors is based on the manner and weight of penalty the Chinese authorities will hand to Alibaba if it is found wanting in any area of the probe.

“The antitrust investigation into Alibaba has yet to specify the penalties, which is worrying investors a lot,” said Zhang Zihua, chief investment officer of Beijing Yunyi Asset, adding that the probe outcome could greatly change the company valuations.

While the Chinese authorities are not ignorant of the role of its online industry in its economy, the investigation has become a bitter pill they must give the players to show them who is calling the shots.

Ant was valued at about $315 billion before its IPO was halted. The company’s payment system commanded $17 trillion worth of transactions in one year, a market influence that would be severely undermined if Alibaba is penalized.

“The new regulations are hurting big internet platforms, so you see Tencent and other tech companies are also seeing their share prices going down,” said Li Chendong, a Beijing-based tech analyst, adding that Alibaba is the target of the regulators so the reaction is stronger.

The regulatory inquiry has been based on “choosing one from two”, a practice that forces merchants to sign exclusive cooperation pacts that prevent them from offering products on rival platforms. Alibaba had been warned earlier about the practice before the State Administrator for Market announced the probe on Thursday.

Bloomberg analysis noted that the worst case scenario would be for Ant to forgo its money management, credit and insurance business, halting its operations in the units that service half a billion people. Ant’s credit tech, which includes Huabei and Jiebei units, was the biggest revenue driver for the group, contributing 39% of the total revenue in the first six months this year, according to a report by Bloomberg.

The report noted that China’s private sector has maintained a delicate relationship with the Communist Party for decades, and has only recently been recognized as central to the nation’s future.

Analysts believe that the Communist party has become wary of the influence and freedom the tech billionaires in China have acquired, and wanted to make a statement by scapegoating Ant and Alibaba. It is also believed that Ma’s criticism bloated the “delicate relationship” that the Chinese authorities have been managing due to its economic value. Now they are ready to clip the wings of the tech giants to tell them who is in charge, even if it will come at a huge economic cost.

“That outcome would be underpinned by the idea that China’s leaders have grown frustrated with the swagger of tech billionaires and want to teach them a lesson by killing off their business – even it means short-term pain for the economy and markets,” Bloomberg noted.

This step may mean that investors’ confidence in Chinese online markets has been dampened, and big tech companies intending to go public will suffer the short term consequences. Ant’s IPO, which was going to be the largest in history, was halted, and there is no assurance it will be authorized in no distant future.

But the Chinese Communist Party doesn’t care, as long as the losses sound the “we are still in charge” warning to the tech companies and their billionaire owners.

“The Communist party is the end-all and the be-all in China. It controls everything. There is nothing that the Chinese Communist Party doesn’t control and anything that does appear to be gyrating out of its orbit in any way is going to get pulled back very quickly,” said Alex Capri, a Singapore-based research fellow at the Hinrich Foundation. He added that “we can expect to see more of that.”