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Jack Ma's Ant Group Has Its Wrist Slapped

Haiping Zhang, Senior Lecture, Economic Department, University of Auckland. Xin Chen, Research Fellow, NZ Asia Institute University of Auckland

In recent years Jack Ma has been increasingly held up as the poster child of China’s digital economy. His Alibaba Group dominates more than 60% of China’s online shopping market. Alibaba’s business platforms make up China’s most popular e-commerce destinations, servicing 750 million active Chinese buyers annually.

Moreover, Alibaba’s mobile wallet platform, Alipay, has opened online payment channels in more than 200 countries around the world, including New Zealand, for cross-border transaction settlements between Chinese customers and overseas merchants.

Built on and now running Alipay, the Ant Group has grown since its establishment in 2014 into the world’s largest and most comprehensive online financial services company. Jack Ma and his team have kept their promise that the “Ant” is meant for and interested in only serving China’s micro and small businesses, and low-income consumers. According to its reports, the Ant Group has funneled business loans to more than 29 million micro and small merchants, the first ever operational assistance for 80% of them.

Meanwhile, the Ant’s consumer credit products, Huabei (just spend) and Jiebei (just borrow), have provided micro-lending services to 500 million individual customers and helped increase the spending power of low-income earners by 50%. To build and support its envisioned “cashless” and “inclusive” financial “ecosystem”, the Ant Group overtly confirms that it collaborates with more than 2,000 financial institutions and commercial banks, and 170 asset and investment management companies.

Incorporating artificial intelligence, big data analytics, cloud computing, and blockchain technology, the Ant Group has also created a user-friendly “3-1-0” online lending model, that is, three minutes for loan application, one second for approval, and zero human intervention. By leveraging the enormous database of transactions, spending patterns, payment behaviours, and obligation fulfilment capacities that it jointly holds with Alibaba on their customers, the Ant Group has moreover managed to consistently keep the delinquency rate below 2%.

Through all this effort, the Ant Group has indisputably become an integral part of daily life in China. It is thus hardly surprising that the sudden suspension of its initial public offering (IPO) by the Shanghai and Hong Kong Stock Exchanges in early November 2020 captured wide attention from many sectors of Chinese society.

In a matter of days, China’s most popular web search engine, Baidu, displayed more than 10 million results on the incident. Public interest in why the Ant’s IPO was “buried” and how Jack Ma was “tamed” has since continued to escalate across China.

It is now a common knowledge in China that the Ant Group has a broad range of financial licences, which have given it a powerful and lucrative grip over banking, securities, lending and insurance industries and institutions. The intense public curiosity and scrutiny has also brought into the open a “strategic partnership” and “best teammate” relationship that the Ant Group has been enjoying with all the five biggest state-owned banks and about 100 incorporated banks and credit cooperatives in China.

The “strategic partnership” has allowed the Ant Group to focus its small loan business on profit optimisation with little concern about the high debt leverage incurred. As stressed in many academic, policy and social media analyses listed on Baidu, in the first three years after its incorporation in 2014, the Ant Group’s registered capital rose from RMB1.3 billion (US$200 million) to 3 billion (US$463 million).

During the same time, however, it had handed out RMB265 billion (US$41 billion) in small-ticket loans, but only 2% of these sat on its own balance sheet. The rest was packaged as asset-backed securities (ABS) and sold to its “partner” banks and financial institutions. This 2-to-98 percent arrangement continued into July 2020, when the Ant Group made its IPO announcement. By then, the loans facilitated by the company stood at RMB2.1 trillion (US$325 billion), while its own contribution to fund the lending was RMB40 billion (US$6.2 billion), and its registered capital amounted to RMB23.7 billion (US$3.6 billion).

The Ant Group’s skewed, and now much publicised, debt-to-asset ratio has stoked mounting public astonishment and unease. Many Chinese are appalled to find that in building its online micro-lending empire, the company has created an “iterative loop” of making loans, then packaging and selling them as loan-backed securities, then using the money to make more loans, then selling them as securities again. They recall that mortgage securitisation escalated by the global saving glut since the end of the 1990s stimulated lenders’ risk-taking behaviours, and eventually triggered the U.S. subprime mortgage crisis between 2007 and 2010. They nervously wonder what devastating risks might the Ant’s algorithm-based lending and securitisation, fuelled by fast-expanding funding networks, impose on China’s financial system and the entire economy?!

Adding to the dismay of many Chinese is the revelation in the Ant IPO extravaganza that Chinese fintech (financial technology) lenders have circumvented, through tremendous technological innovations, many rules and regulations established for mainstream commercial banks. Worse still, it remains anyone’s guess when Chinese regulatory authorities may catch up with the curve and modernise/expand their toolbox.

Nevertheless, they did manage to issue a consultation draft of interim administration measures for online micro-lending business on 3 November 2020. Whether the public’s unease is mitigated, the release of the draft regulations has certainly seen more negative attention crowding towards the Ant Group and Jack Ma. Whatever the final outcome, for now, Jack Ma and his Ant Group have received a wrist slap by the stock exchange regulators

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