China’s fintech industry reached a turning point in November 2020 when Ant Group’s $35 billion initial public offering (IPO) was suddenly scrapped. The mega-deal’s withdrawal came as a surprise given its underlying significance to the broader investment community.
Amid tensions between Beijing and Washington DC, Ant shares were approved for both Hong Kong and Shanghai bourses. The dual listing was seen as a confidence boost for China’s capital markets, demonstrating its ability to raise the world’s largest offering since the near-$30 billion record set by Saudi Aramco.
In the months that have followed, Chinese authorities have introduced new rules governing fintechs, data management – and everything tech related. The transition represents a major shift from its previous ‘light touch’ approach, which enabled many tech leaders to emerge.
A December 2020 commentary by the People’s Daily, the official newspaper of the Central Committee of the Chinese Communist Party (CCP), highlights the change: “Internet giants with immense data and advanced algorithms should shoulder greater responsibility, aim higher and do more in tech innovation.”
With policymakers viewing Alibaba’s fintech arm as a finance company first and technology player second, other Chinese tech companies are re-evaluating their own businesses. Because fintech infrastructure for digital wallets and payment is data-heavy, Ant Group has agreed to change its business model to establish a better rapport with authorities.
However, Ant’s response underscores the few good options for Chinese fintechs. Besides injecting the business into a holding company, Ant Group will provide at least 30% of any loan they offer in partnership with banks, a move likely capping both growth rates and operating margins for the lending business.
Many welcome the oversight. Chinese banks have long argued that the fintech industry’s explosive growth rate stems from regulatory arbitrage rather than technological innovation. Analysts expect the stricter regulatory environment and subsequent market share loss by fintechs could feed business back to the banks.
Yet underneath the new regulatory rollout, Beijing is engaging in a balancing act of its own. Central authorities are known to exhibit a low tolerance for anything that instigates social instability, particularly finance related. This coincides with policy ambitions to support technological innovation stated in the 14th Five-Year plan laid out earlier last year.
The politics create a frustrating ceiling for technology firms, especially those offering financial services. “The Chinese regulators are not going to allow the likes of Ant and other fintech players to disintermediate the traditional banking system which still holds RMB 92 trillion of household deposits,” according to Christopher Wood, equity strategist at Jefferies.
China’s peer-to-peer (P2P) lending industry serves as a recent example reflecting this challenge to have digital economic gains without any social costs. While P2P financial innovation was seen to spur credit to borrowers outside the traditional banking sector, loose oversight and low entry barriers invited fraud.
Beijing quickly responded, clamping down on a sector that had grown to more than 6,000 companies, to only a handful today.
Notably, investor appetite has waned. Analysts have revalued Ant Group’s restructured company between a third and half of the initial $300 billion estimate, using market multiples closer to mature bank stocks.
With less interest, fintechs may face tougher paths to raise money in the markets where they generate their business.
This is an excerpt from an article in the Summer 2021 issue of FinanceAsia
