Opinion | China and the fall of the Jack Ma ant group

The shutdown of Ant’s IPO came at a key time. From China latest economic figures, published on April 16, confirms its solid recovery after the Covid-19 recession. But to maintain high growth, the country needs to increase the productivity of its industries, modernize its technology, and depend less on inefficient state-owned enterprises – daunting challenges.

In 2020, the government developed a “dual circulation” strategy to become more economically autonomous. This involved promoting local innovation in sectors such as telecommunications and green energy, and relying more on domestic sales than on exports. In part, the strategy is a response to lingering economic tensions with the United States. But this comes with an important pivot in the attitude of the government: the private sector is important for economic development but must follow official priorities and demonstrate loyalty to the government.

Why didn’t regulators put the brakes on Ant sooner? To put it simply, Ant’s success made the government look good. His position as a world champion in financial technologies has galvanized the Chinese economy. Ant has made digital payments and banking products available to a large segment of the nation’s population, helping poverty alleviation efforts. The Alipay app has more than 700 million monthly users, including residents of remote rural areas. Ant has funded some 29 million small businesses, including street vendors.

Maybe Mr. Ma believed he didn’t need to look over his shoulder. After all, for many years China has tacitly tolerated underground financial institutions with less regulation and supervision than traditional commercial banks. These outfits, called shadow banks, offered higher interest rates to depositors, and extended credit to riskier borrowers, including small entrepreneurs that government-backed banks ignored. (Ultimately, the government tight down on this sector once it became too risky: the increase in defaults and bank failures led depositors to lose their savings.)

Ant has taken advantage of the government’s passive approach to regulating fintech companies, developing a wide range of financial products and services aimed at a growing middle class. Mr. Ma used his influence and political power to protect his business from regulatory oversight, even refusing to share its mine of consumer data with the government.

Financial regulators are concerned about how quickly Alipay, as well as a rival, WeChat Pay, dominated digital payments, deterring new entrants. Indeed, this has spurred a government project to develop a digital version of the Chinese currency as an option for digital payments. Ant, they feared, also collected data on its users to judge their creditworthiness and offer them loans on better terms than public banks.

Meanwhile, he could hide the risks associated with these loans by spreading his income and losses among the different branches of his conglomerate. Even during its expansion, as a fintech company Ant could avoid strict regulations banks are subject to. Indeed, it might get too big to fail.

About Myra R.

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