Chinese President Xi Jinping really has it in for Jack Ma. It's Communism vs. Capitalism.
Alibaba Group Holdings (BABA) shares tanked today in Hong Kong trade, closing down 8.0%, deepening a descent that started in late October. The stock has now shed 29.5% since October 23, leaving it almost flat for the year, and at its lowest ebb since June.
The company has lost about US$116 billion in market capitalization in the last two trading days. That's after China announced last Thursday it was launching an antitrust investigation into Alibaba, which runs the dominant Chinese e-commerce sites Taobao and the upscale Tmall.
In the latest wrinkle, Chinese regulators are seeking to restructure and possibly break up Alibaba's fintech subsidiary Ant Group, which runs the ubiquitous AliPay digital-wallet app.
In a country where credit cards have not been commonly used outside the biggest cities, AliPay allows users to use their mobile phones to pay for virtually anything: groceries, taxis, train fares, movie tickets, your mobile-phone bill, insurance...
Chinese financial regulators are now scrutinizing the business of Ant Group. At the heart of their concern is whether it has the necessary licenses and capital reserves to offer the kinds of financial services it does.
Ant said on Sunday that it would "greatly" improve its compliance by conducting an overhaul of its business. Ant executives met on Saturday with officials from, well, just about any financial regulator involved: China's central bank, the People's Bank of China; the China Banking and Insurance Regulatory Commission; the China Securities Regulatory Commission; and the State Administration of Foreign Exchange (SAFE).
The central bank's deputy head, Pan Gongsheng, took to the official Xinhua news service to accuse Ant of "having poor legal awareness, flouting regulatory compliance requirements, foul play for regulatory arbitrage, leveraging market dominance to exclude competitors, and hurting consumers' legitimate rights and interests."
Financial regulators have identified "major problems" in Ant's business operations, and are urging it to set a timetable "as soon as possible" to fix them.
Pan said Ant would be required to "return to its original business as a payment services provider," as well as to enhance transparency. It must improve how it stores personal data, and carry out individual credit reporting, he said.
It appears Ant will be forced to restructure. Ant will have to set up a financial holding company, Pan said, with the right supervision, capital sufficiency and legal clearance.
Separate from Ant's problems, the State Administration for Market Regulation said on Thursday that it has launched an antitrust investigation into Alibaba. Ant originally served just as an escrow service for the two parties transacting goods on Alibaba's Taobao e-commerce site. The buyer parked the cash with Ant, which then dispersed it to the seller. That left Ant with temporary huge piles of cash, however. It took that base to build out a wide span of financial offerings.
It has been common for Taobao and Alibaba rivals such as JD.com (JD) and Pinduoduo (PDD) to require merchants to pick "one from two," selling their wares only on one e-commerce platform for fear of getting kicked off by serving the other. That's clearly anticompetitive, and damaging to consumer choice. The most successful Chinese startups also commonly restrict investors from placing money in their rivals, if they want to continue investing in spinoffs from that corporate group.
The fintech already changed its name to Ant Group from Ant Financial to distance itself from its original attempts to cast itself as a financial one-stop shop. After Alibaba figurehead Ma, who with a fortune of US$57.3 billion is Chinese richest person, made public fun of the Chinese financial industry and regulators - he told a Shanghai conference that Chinese state-owned banks had a "pawnshop mentality" when it came to extending credit - they got their revenge.
It's clear that Communist Party officials are worried Ant and Ma have been too liberal with their credit. The subtext to the fight is that Communist Party officials want to remind Ma and other private-sector successes as to who is really in charge.
Soon after Ma's speech in late October, which was attended by influential bankers and financial regulators, the China Securities Regulatory Commission said it was calling in Ma, Ant Executive Chairman Eric Jing and Ant CEO Simon Hu for questioning. The CSRC - the equivalent of the U.S. Securities and Exchange Commission - didn't say what the discussions were about, but Ant said in a statement that "views regarding the heath and stability of the financial sector were exchanged."
Ant was then forced on November 3 to pull its initial public offering in Shanghai and Shenzhen, which at US$37 billion was set to be the largest in global history. The cancellation came just two days before the shares were supposed to start trading, and after regulators and the markets in both cities had cleared the offering. There's informed speculation that Chinese President Xi Jinping himself stepped in to prevent the IPO from taking place.
The scrutiny is now deepening. Ant last week suspended its service that allowed customers to deposit cash with regional banks across China. That may violate rules against operating across provincial borders.
The company has also slashed the credit limits of many users, which it extended so they can make purchases. Pan, the central banker, said Ant has been offering "illegal credit loans," and has questioned its insurance and wealth-management services.
AliPay's rival, WeChat Pay, is run by Tencent Holdings (TCTZF) and may soon face similar pressures. Tencent shares fell 6.6% on Monday in Hong Kong, although they are up 38.2% in 2020 thanks to the company's booming business in smartphone and online videogames.
In contrast to Alibaba's struggles, Chinese stock markets have in general been flying. The CSI 300 of the largest companies listed in Shanghai and Shenzhen is up 23.6% in 2020.
It's an impressive rebound after central Wuhan became the Chinese city where the Covid-19 pandemic first broke out. China's economy will likely grow 2.1% this year, according to Oxford Economics, leading into rampant 7.8% growth in 2021.