As Jack Ma’s clash with the Chinese government draws to a close after almost three years, it’s clear how costly the conflict has proven for his companies, Ant Group Co. and Alibaba Group Holding Ltd.
Chinese authorities said on Friday they would wrap up a probe into Ant with the financial technology company paying a fine of almost $1 billion. The investigation began after Ma critiqued Beijing’s regulation of the financial sector in 2020, forcing Ant to pull the plug on what would have been the largest initial public offering in history.
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The costs go far beyond the latest fine. The crackdown has added to an erosion of confidence in the private sector in China as the country faces growing weakness in everything from consumer spending to the housing market, exports and infrastructure investment. Ant has had to overhaul its business model, pulling back from sensitive sectors and easing up on competition with state-backed banks. Its valuation, envisioned at about $315 billion after the IPO, has dropped to about $78.5 billion.
On Saturday, Ant proposed to buy back as much as 7.6 per cent of shares in an effort to provide a chance to cut stakes for investors ensnared by a years-long regulatory crackdown at the fintech powerhouse.
Alibaba hasn’t fared any better. Xi Jinping’s administration targeted the e-commerce pioneer in a crackdown on leading internet platforms, and Alibaba said earlier this year it would split into six major businesses. Alibaba’s market value is $234 billion even after an 8 per cent rally in shares Friday with the end of the Ant probe. That’s about $620 billion off of its peak in 2020.
“The companies have done their mea culpas and the punishments are over — at least for this series of issues,” said Kendra Schaefer, a partner at Beijing-based consultancy Trivium China.
Ma’s Hangzhou-based empire was at the heart of a Communist Party smackdown that hit wide swaths of the private sector, from real estate and online education to games and ride-hailing. Xi recalibrated the country’s economy to emphasize “common prosperity” and support for the middle class. The reforms wiped more than $1 trillion from Chinese stocks, with venture capitalists and institutional investors paying a price for the party’s values.
While China’s latest measures may signal an easing of the crackdown, the policy priorities of ensuring social stability and national security remain unchanged.
“You have to take care of employees and society, and then you can take care of your investors,” said Schaefer. “That’s really the message now.”
The lost value for Ma’s properties of more than $850 billion is a sign of how difficult it will be to rebuild trust with international investors. Not only have corporate profits come under pressure as economic growth slowed, but national priorities have shifted in fundamental ways.
China’s economic woes are now multiplying, putting pressure on Xi to rebuild support in the private sector. In a downside scenario — with a sharper property slump, slow pace of reforms and more dramatic US-China decoupling — Bloomberg Economics sees China’s economic growth decelerating to 3 per cent by 2030.
Along with Ant, the People’s Bank of China levied fines on several other banks and Tencent Holdings Ltd. Ant and Tencent put out their own statements after the fines, suggesting they’ve largely completed the reforms necessary under the country’s regulations.
“Authorities clearly have struggled to determine exactly what they want the financial technology space to look like and the role of big technology firms in it,” said Martin Chorzempa, fellow at the Peterson Institute for International Economics. “This is why it has taken so long to determine that they are nearing the finish line of the rectification plan with the most important financial technology company in China.”
Jack Ma’s fall from grace began in October 2020 when the long-outspoken entrepreneur stepped onto a stage in Shanghai at the Bund Summit to address investors and government officials. With Ant poised to go public in a blockbuster IPO, Ma gave a 20-minute roasting of what he called anachronistic regulations that would stifle innovation in the country.
Just days later, officials summoned Ma to the China Securities Regulatory Commission and explained they had found an array of shortcomings in Ant’s business that range from consumer lending and wealth management to online payments. The IPO, which could have raised $35 billion, would have to be called off.
The fintech giant has since been hit with additional regulatory roadblocks and forced to behave more like a traditional bank.
Ant’s profitability tumbled as the company restructured its business to satisfy the demands of China’s watchdogs and shifted its focus from expansion to regulatory compliance. Its net income dropped from double-digit growth in early 2021 to four consecutive quarters of year-on-year decline in 2022. In early 2023, Ma said he would relinquish control over Ant though he will retain about 6.2 per cent of the voting rights based on Bloomberg calculations.
There have been a myriad of setbacks Ant ran into at the height of the two-year tech crackdown. In April 2021, Chinese authorities demanded Ant to turn itself into a financial holding entity but to this day the company hasn’t been able to obtain a license.
Ant was also forced to open up its payments app to competitors and its lending practices have been significantly curbed. The firm was banned from conducting maneuvers that steered users toward loans and other more lucrative services, and its ability to lend was limited with new rules. Consumer loans jointly made with banks — previously a major engine of growth — were split from its Jiebei and Huabei brands.
Ant holds a 50 per cent stake in the consumer-lending business, set up in 2021 as part of its revamp, that has the capacity to issue about 400 billion to 500 billion yuan of loans, based on Bloomberg calculations. Assets under management at Ant’s money-market fund Yu’ebao — once the world’s largest — dropped about 36 per cent to 759 billion yuan ($111 billion) as of September from two years ago.
To some extent, Ant’s numbers reflected stagnant growth of China’s broader internet sector pummeled by China’s prolonged, stringent Covid restrictions and tightened scrutiny. Amidst growing economic and regulatory uncertainties, Alibaba has also dwindled and become a shadow of its former self.
Once Asia’s most valuable company, Alibaba’s core domestic commerce business was hammered by an antitrust probe and ultimately a record fine of $2.8 billion in 2021. It is further hamstrung by increasingly fierce competition with rivals including JD.com Inc. and PDD Holdings Inc., and loss of market share in the cloud to state-backed rivals.
After Alibaba posted its third consecutive quarter of single-digit revenue growth, China’s largest e-commerce company unfurled a historical management reshuffle in June. It brought back Ma’s longtime lieutenants Joe Tsai and Eddie Wu to run the empire just months after the firm announced a plan to break into six major units. The pair bears the hope to turn around a company that has struggled to regain its footing since Beijing’s crackdown.
However, investors seemed ambivalent to the shakeup. Alibaba’s stock fell 1.5 per cent the day the new appointments were unveiled, and slipped for the next three trading days. A split Alibaba may also only compound Ant’s woes.
“Alibaba’s breakup plan may do Ant more harm than good,” said Francis Chan, senior analyst at Bloomberg Intelligence. “Its ‘crown jewel’ credit business faces pricing and capital constraints on growth. Credit investigation firms will stand between Ant and its funding partners. Firewalls in its ecosystems limit cross-selling potential. Payment fees are becoming smaller too, while Yu’ebao has lost its appeal to retail investors.”
Ma, who remains the spiritual leader of Alibaba, showed up in Hangzhou last month ahead of the management shakeup. Ma went home in early March following a prolonged period of traveling overseas after the government made attempts to persuade Ma to return as a means to showcase authorities’ support for private entrepreneurs.
Chinese officials have sought to reassure both foreign and Chinese firms that the country is open for business again, challenged by a bumpy post-covid economic recovery and ongoing tensions with the US over tech supremacy.
That campaign hasn’t been particularly effective. The aggregate VC investment in China has dropped to $3.6 billion in the first four months in 2023, down 50 per cent year-over-year, according to data provider Preqin.
“The hefty fine on Ant and Tencent, on one hand, demonstrates Beijing’s commitment to strengthening financial supervision, but on the other hand, it also signals an end to the country’s systematic rectification of so-called internet platform companies,” said Shen Meng, director of Beijing-based boutique investment bank Chanson & Co. “The purpose is to stimulate the confidence of private enterprises, but whether it could deliver that result remains to be seen. There might be a gap between Beijing’s expectation and the reality.”