Ant Group got a sudden reminder of the regulatory risk it faces just days before the company’s shares

begin trading in Shanghai and Hong Kong on Thursday, and analysts say the fintech giant’s long-term
growth may be tempered by the government’s mounting scrutiny.

Billionaire cofounder Jack Ma and other senior executives were summoned on Monday to a joint
meeting held by four top financial regulators that included the country’s central bank, the People’s Bank
of China, and the China Securities Regulatory Commission (CSRC), according to a brief post on CSRC’s
website. While neither side disclosed details of the discussion, analysts say the development signals
growing worries of potential risks associated with the rapid expansion of Ant’s lending business.

“China’s financial system is in the phase of strengthening regulation and controlling risks,” says Zhu Ning,
a professor of finance at Shanghai Jiao Tong University. “Ant Group’s business may not be entirely in line
with what regulators want.”

For example, Ant has made partnering with Chinese banks a centerpiece of its growth strategy. The
Hangzhou-based company works with lenders to extend consumer credit through the use of
technologies like its risk-control software, charging the banks a percentage of the interest income
generated.

But the company doesn’t directly fund the loans. Only 2% of the 1.7 trillion yuan ($254 billion) in credit
that Ant facilitated as of June this year was on its balance sheet, while 98% was underwritten by partner
banks, according to its prospectus. Of the 72.5 billion yuan in revenues generated in the first half, about
40% were attributed to fees earned from its lending arm. The rest included service charges from
payments made using its popular Alipay digital wallet, which now boasts more than 700 million monthly
active users.

But China’s regulators have recently been taking action to safeguard against financial risks and control
leverage ratios. On the day summoning Ma, regulators also released a set of draft rules targeting online
micro lenders. It proposed caps on the amounts that individuals can borrow, while requiring platform
operators like Ant to fund at least 30% of the loans they facilitate on behalf of the banks.

“If strictly implemented, then the scale of Ant’s credit business will come down,” Zhu says. “What is
worrying regulators, and what the banks don’t like, is that Ant Group has generated revenues from its
lending arm, but hasn’t shouldered the correlated risks.”

A company spokesperson declined to comment on the draft rules, but says it will “implement the
meeting opinions in depth.” The outspoken Ma, who is now China’s richest man after Ant’s IPO lifted his
fortune by $27 billion to its current $66 billion, recently criticized financial regulators for stifling
innovation during a conference held in Shanghai in late October.

“Good innovation is not afraid of regulation, but is afraid of outdated regulation,” Ma said. “We
shouldn’t use the way to manage a train station to regulate an airport, neither should we regulate the
future with the method from yesterday.”

Brock Silvers, chief investment officer of Kaiyuan Capital, says Ant’s business is still evolving, and “today’s
Ant may not necessarily resemble tomorrow’s Ant.” Some analysts say the potential regulatory actions
won’t derail the forthcoming debut, but also caution that investors might have second thoughts about
Ant’s future growth.
“Regulatory risks are the biggest risk factor for Ant Group,” Sanford C. Bernstein analyst Kevin Kwek
wrote in a research note. “We think the news will only be incrementally negative to the listing and
believe most investors will remain optimistic on Ant's positive long-term prospects. Investors might
nevertheless revisit their assumptions of growth given the clear signs of regulatory intervention.”