Further interventions into the Ant Group by the regulator ensure that the businesses will be less nimble, less efficient, and less innovative but, more importantly, state-controlled, with the state having full access to all of the financial data of Chinese citizens.
This is bad news for the fintech sector in China, which will now have a disincentive to innovate, meaning that its brightest and best will go overseas to create their fintech start-ups.
This is yet another example of how the Chinese state’s need for control may well hamstring its long-term ambitions to become the leading global technology powerhouse.
More details of the fate of Ant Group have emerged, with the regulator now demanding the break up of AliPay with payments in one app and its loans in another.
Previously, only the back end was ordered to be separated, which combined with the requirement for large amounts of capital to backstop the loan portfolio, effectively turned Ant Group into a bank with no deposits.
Now the regulator is demanding a complete separation where AliPay is one app and the lending in another, meaning that the rapid assessment of creditworthiness, which was one of the hallmarks of Ant’s success, will be no more.
Effectively the company is being split into three pieces.
First, payments: This is the old AliPay which for the moment will remain under the ownership and control of Ant Group.
Second, credit score: This will be a joint venture between Ant Group and the state where creditworthiness will be assessed.
This venture will have full access to all of the financial data to make the assessments, and at the same time, the state will be able to look in on anything that it wants to.
Third, credit: This is the old Huabei (credit card) and Jiebei (consumer loans), which will now have a separate app through which the loans will be delivered and administered.
What was once a sleek, rapid, and largely automated credit approval and issuing business will become a slow, cumbersome, and bureaucratic procedure as requests for credit and data are shuffled from one organisation to another.
In other words, it becomes a bank.
This is yet another nail in the coffin of Ant Group, whose investors have already paid very dearly for Jack Ma’s indiscretions.
Ant Group has effectively been reduced to a bank that needs to raise capital from the credit markets in order to lend it out to customers.
For a bank, this is suboptimal as the best place to get capital is from consumer deposits, which Ant’s giant legacy competitors do.
Hence, not only is Ant Group now competing with the state-owned behemoths, it is doing so on unfavourable terms.
Its key competitive edge of speed, nimbleness, and accurate credit assessment has been completely undermined, meaning that the threat that it posed to the legacy banks has been all but removed.
For any Chinese entrepreneur with a great idea of how to revolutionise financial services, the message is clear.
These events incentivise financial innovators, entrepreneurs, and investors to leave China and employ their talents overseas, which I think may start to happen should the state continue to crush financial innovation.
This would be very bad news for China’s ambitions to become the global technology leader as its brightest minds would employ their talents elsewhere.
For all authoritarian regimes, control of money and banking is deemed essential. So I remain very cautious on any financial sector in China outside of the stodgy, slow-moving state-owned banks.
Alibaba still has a 30% stake in Ant Group which is why it is falling so hard today, but in my assessment of Alibaba, I have long written Ant Group down to zero.
Hence, I continue to think that there is value in Alibaba, and I still hold it as the regulatory shadow has pretty much moved on to other pastures.
I also hold three of the state-owned banks, which I see as the main beneficiaries of the regulatory cataclysm on the fintech sector, and they pay me a 7% dividend yield while I wait for them to recover.
China continues to do the USA’s job for it without the USA having to lift a finger.
Related article: China imposes sweeping restructuring on Jack Ma’s Ant Group