The Continuing Saga of China’s Ant Group

Chongqing Ant Consumer Finance, a subsidiary of Alibaba’s spinoff financial arm, Ant Group, recently received regulatory approval to raise $1.5 billion to expand itself into the consumer finance business. With the approval, China Banking and Insurance Regulatory Commission based in Chongqing will let Chongqing Ant Consumer Finance raise its capital from 8 billion yuan to 18.5 billion yuan. Once the deal is concluded, Ant Group will control 50 percent of the shares of a new subsidiary, according to the restructuring plan. 

This is significant in the backdrop of two events. First, Jack Ma, the founder of Alibaba and one of China’s star entrepreneurs, has ceded control of Ant Group. Second, the approval marks a contrast with the backlash that Alibaba received in 2020, when Ant’s IPO – expected to be the biggest in history – was torpedoed by state regulators as part of their antitrust regulative practices. With the funding approval and restructuring, it seems the two-year punishment of Alibaba is coming to an end. 

However, the restructuring and funding plan comes on the condition of having the city of Hangzhou as the second biggest shareholder in the consumer financing business. That poses the question of whether the approval is a green light for softening the state’s harsh regulatory control or simply yet another attempt to involve the state as an anchor in a private business. With that in mind, the recent developments say a lot about China’s regulatory approach to its tech sector, when a flamboyant entrepreneur who built an empire over decades has to leave his company after coming into the crosshairs of regulators for not being compliant with state goals.

Ant Group’s Rocky Road

Ant Group’s history, while short, is already full of bumps. Ant Financial Services Group was founded as a subsidiary of Alibaba Group in 2014 to handle Alipay and other consumer financial services. The company controls almost all of Alibaba’s consumer payment businesses, including Alibaba’s e-commerce platform, Taobao, with more than a billion users, and constitutes one of the world’s largest micro-lending businesses. 

Ant Group rose to fame and controversy at the same time in 2020. Soon after a public speech by founder Jack Ma criticizing the Chinese state’s heavy hand in business regulation in China, its planned IPO, expected to be the largest in history, was quashed by state order. Had it gone public, Ant Group would have been valued at more than $300 billion. As a part of the state’s crackdown on tech giants, the state regulatory agencies also fined Ma for following unfair monopolistic market practices. Ma, despite not being on the board of Ant Group, held 50.2 percent of voting rights via one of his entities and was a larger-than-life figure at the company. 

In 2020, the People’s Bank of China summoned the executives at Ant Group and ordered them to formulate a rectification and restructuring plan to set things right in the company’s credit, investment, insurance, and wealth management services. Ant Group was also required to figure out its ownership structure before it applied to become a financial holding company. 

Amid much anticipation, the restructuring for Ant Group was called off in January 2022 when Cinda Asset Management scrapped a deal to buy 20 percent of Ant Group shares (worth $944 million) without any explanation. According to Reuters, after the CBIRC approved Cinda’s funding plan, China’s State Council questioned the investment in Ant Group without having it restructured as per state demands.

This resulted in a big loss to Ant Group, just after Ma’s public disappearance. Had the deal been approved by the regulators, Ant Group would have secured an investment of around $3.2 billion, nearly twice what it is being offered under the latest deal. 

According to industry experts, to ease the process, company executives informed regulators about Ma’s intention to shed his stake in Ant Group. In fact, due to the state-administered regulatory hurdles, Ant Group has been attempting to cut its ties with parent Alibaba. Over seven top executives of Ant Group have already ceded their partnership with Alibaba and its other subsidiaries in the last couple of years. On top of that, long-term commercial and data-sharing agreements between the two companies have been terminated due to Ma’s complicated relationship with the state regulators. 

The final blow given by Jack Ma’s complete withdrawal from Ant Group – followed shortly by approval of a new funding deal – suggests two things. First, the billionaire’s controversial remarks about the Chinese state and party – and his relationship with Ant Group – have indeed been scuttling the functioning of the financial services company for the last two years. Second, the final deal reshaping the ownership structure of the company and the formation of a financial holding subsidiary was linked with regulatory pressure for Ant Group to cut ties with Ma. 

Restructuring or Co-ownership?

On December 28, 2022, the Chongqing division of the China Banking Insurance Regulatory Commission approved the plan to raise the capital of the Chongqing Ant Consumer Finance unit to 18.5 billion yuan from 8 billion yuan. Chongqing Ant Consumer Finance Group was created by Ant Group in 2021 following China’s tech crackdown. Interestingly, the second largest shareholder in the company’s board, having 10 percent of the shares, will be Hangzhou Jintou Digital Technology Group, a company owned by Hangzhou city. 

In other words, after ousting Ma, Ant Group, a privately led start-up, has now been forced to be placed into co-ownership with the government. Other shareholders listed in the deal are Sunny Optical Technology and Transfar Zhilian Co. With this restructuring, the firm’s consumer finance business is expected to be brought under the regulatory limits, as opposed to coming under the leadership of Ma, with his past criticisms of the state. 

Moreover, the regulatory overhaul also directed the company to sculpt out CreditTech, a division operating Ant Group’s loan services – namely Huabei, which issues virtual credit cards, and Jiebei, which provides consumer loans – into a separate entity with government co-ownership. That means Ant Group’s consumer loan business will now operate separately from Alipay, Alibaba’s online payment app. 

A Carrot or a Stick?

The regulatory approval and the long-due funding and restructuring of Ant Group are fueling hopes that Chinese authorities may prioritize economic growth over a regulatory crackdown on tech giants. The move comes weeks after Beijing signaled that it would support the growth of technology firms. December 2022 also saw Chinese video game regulators approving licenses to 44 foreign games for release in China. 

Amid the social and economic discontent due to the COVID-19 surge and the previous zero COVID policy, lifting the party’s tough approach toward tech business may provide hope to the Chinese people that the CCP is now emphasizing economic growth. In the last two years, the Chinese state, claiming to ensure positive growth of its tech companies, has surfaced a slew of measures like the new anti-trust laws, data protection regulations, and a law governing the algorithms provided by tech companies. 

However, it is foolish to expect that the state crackdown on the tech sector is going to end anytime soon. Even though there have been some reversals in Ant Group’s fortunes, with regulatory reforms, funding approvals, and a restructuring plan, the state keeping the piece of the cake for itself portends even stricter control over tech businesses in China. Although the measures signal a priority on development, Beijing is still sticking to the concept of “development and regulation in parallel.” Since the motivation of the Chinese state behind the tech crackdown remains unchanged, it is unlikely to see any major policy reversals toward the big internet firms.