Alibaba Group Holding ( (BABA) and HK:9988) shot 8.7% higher here on Wednesday on word that its fintech spinoff Ant Group has secured regulatory approval to raise cash for its consumer lending arm.
The reported regulatory approval comes one year after the Chinese state-run asset manager China Cinda Asset Management walked away from a deal to invest in the consumer finance business.
The green light Ant has received for its consumer loan capitalization plan is more important than the details themselves. This is Ant, after all, which in November 2020 had the world's largest initial public offering torpedoed at the last minute by Chinese President Xi Jinping himself, two days before the US$37 billion IPO was scheduled to occur. For Ant to now win a nod from Beijing to raise capital indicates the company's political rehabilitation is well under way.
The Ant IPO debacle, originally interpreted as a reflection of anger over Alibaba figurehead Jack Ma's outspoken speech at a Shanghai conference the previous month, marked only the beginning of what became an onslaught on the private sector and what the government deemed the "disorderly expansion of capital." But President Xi's push to work toward "common prosperity" in China and even to redistribute wealth has been dropped from the political rhetoric, both because the attack alarmed all business owners in China and because the Chinese economy ground to a halt during China's zero-Covid push last year. Beijing now needs the help of the private sector and has temporarily shelved its Maoist reforms.
The Chinese financial regulator, the China Banking and Insurance Regulatory Commission (CBIRC), has issued a notice that its division in the western city of Chongqing has approved Chongqing Ant Consumer Finance's plan to raise its capital to C¥18.5 billion (US$2.7 billion), up from C¥8 billion (US$1.2 billion). Ant will have contributed C¥9.25 billion (US$1.3 billion) of that total capital after the deal and will hold 50% of the unit's shares. The investment round will also see a company owned by the city of Hangzhou, where Ant and Alibaba are based, become the second-largest shareholder by taking a 10% stake.
Government co-ownership has been a feature of the regulatory overhaul Ant has been ordered to make. The Hangzhou government would have close ties to the companies in question and, because Hangzhou officials are dealing with some of the city's largest employers, is about as friendly a face as Ant could find among the Chinese Communist Party ranks.
Beyond this deal, Ant is still seeking a license for a financial holding company to operate its consumer businesses. Regulators ordered it to carve out CreditTech into a separate entity with government co-ownership. CreditTech operates two lending businesses, the virtual credit card issuer Huabei and the consumer loan company Jiebei. Those businesses must now operate separately from Alipay, its digital payments app and electronic wallet that is omnipresent in China.
Ant in 2021 created Chongqing Ant Consumer Finance to hold those businesses. Besides Ant, the new investors include the Hangzhou city-owned Hangzhou Jintou Digital Technology Group, which is investing C¥1.85 billion (US$269 million) for its 10% stake, while the listed optical lens maker Sunny Optical Technology ( (SOTGY) and HK:2382) is also investing in the Ant unit, paying C¥1.1 billion (US$160 million) for a 6% stake. The chemicals company Transfar Zhilian (SZ:002010) is the other new investor, paying C¥926 million (US$135 million) for a 5% stake.
The regulatory statement details eight other existing investors as holding smaller stakes that are now diluted. They include Nanyang Commercial Bank, which focuses on lending to trading companies, which invested C¥1.2 billion (US$174 million) for what's now a 6.5% stake. The NetEase ( (NTES) and HK:9999) subsidiary Guangzhou Boguan Information Technology now owns a 3.3% holding.
In January 2022, China Cinda Asset Management scrapped a deal to buy 20% of the Ant consumer finance unit, which would have made it the second-biggest investor. Including Cinda's US$944 million investment, the entire round was intended to raise US$3.2 billion, roughly double what the Ant unit is now getting in the way of new cash.
It still indirectly has a holding, because Nanyang Commercial Bank is a Cinda subsidiary. Cinda did not explain why it walked away last year, leaving Ant to say it "fully respects the business decision made by its investor." However, Reuters reported that, after the CBIRC gave the green light to Cinda's plan, officials higher up the chain of command stepped in to prevent the deal. A source told Reuters that China's State Council, its equivalent of a cabinet, questioned why Cinda was investing when Ant had not completed its restructuring and also why Cinda was moving so far from its original mandate of buying bad loans.
The regulator has given Ant six months to complete the recapitalization. The CBIRC cited two banking commission orders in approving the change, one applying to a 2013 pilot program for consumer finance companies and the other a 2020 licensing measure for nonbank financial companies. Both suggest Ant is well on its way to winning the necessary bank license for the consumer unit. Meanwhile, the increased capital will allow it to issue more loans.
The Beijing government appears to have warmed significantly to a range of industries. Last week, regulators approved 128 new video games for distribution in China, including 44 imported games, the first such approvals in 18 months. Tencent Holdings (TCEHY) won the right to distribute "Valorant," a first-person shooter developed by its Los Angeles-based subsidiary Riot Games.
Tencent shares rose 4.6% on Wednesday, taking their total run-up since Dec. 20 to 16.7%. Alibaba shares are up 14.7% in the same timeframe, but remain at one-third their levels from late 2020. Tencent has rallied strongly since October but is still less than half its peak value in February 2021.
