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Jack Ma's Ant Group was the next big thing. Now it may become just
a boring bank
Analysis by Laura He, CNN Business

Updated 2357 GMT (0757 HKT) February 19, 2021

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Hong Kong (CNN Business) — Jack Ma's Ant Group quickly became one of China's most powerful
companies, and its plans for bridging the worlds of tech and finance were growing ever more
ambitious by the day.

Now it appears to be turning into the kind of highly regulated Chinese bank that it hoped to
supplant.

Months after the company's blockbuster initial public o ering was shelved at the last minute — a
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move that appears to have been sparked by Ma's criticism of Chinese regulators — several
media outlets have reported that Ant has agreed with authorities to become a financial holding
company. MORE FROM CNN BUSINESS

Ant declined to comment on those reports earlier this month, and the details of any potential
agreement were not immediately clear. The company did not respond this week to additional
questions about any deal with authorities.

But the reports suggest that the Alibaba-a liated company may now have to follow rules similar Analysis: Why Lindsey Analysis: Nikki Haley
Graham's peace makes her move
to those required of traditional Chinese banks — a move that could force it to scale down its mission to… against Donald Trump
aspirations to be a dominant force in the tech world.

The company is best known for its Alipay digital

payments app, which boasts more than 700 million
Analysis: The story New York Times:
active users every month. It also has massive interests keeps getting worse Trump Pentagon
in online investing, insurance and consumer lending, for Andrew Cuomo… o cials delayed…

which have helped it grow into business with assets

worth about $635 billion under management.
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Related Article: How Jack Ma built China's

money supermarket into a $200 billion
company

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have dismantled… halfway with Trump

While the company was largely able to grow unchecked over the past decade, the political
winds in Beijing are changing. Authorities are growing increasingly mindful of how much
Missing teen girl's Ivanka Trump tells
influence Ant and its peers have on the country's financial system — Ant, for example, now remains found more Marco Rubio she won't
commands more than half of the mobile payments market in China — and are looking for ways than 7 years after… challenge him for…

to rein them in.

"The Chinese government is moving to regulate these apps with a much heavier hand," said
Doug Fuller, an associate professor at the City University of Hong Kong who studies
technological development in Asia. "The aim is not to kill these apps, but the days of
unrestrained growth and hopes of displacing traditional banking some day are over."

A pedestrian walks past an Alipay sign outside an Ant Group Co. o ce building in Shanghai, China, on Thursday, Dec. Advertisement
24, 2020.

What it means to be a bank

Beijing's tech crackdown has taken many forms over the past several months. Not only did
regulators force Ant Group to call o its record-breaking IPO, they also launched an antitrust
investigation into Alibaba (BABA), questioned executives at Tencent (TCEHY) and Pinduoduo
(PDD), and floated new rules that could govern the operations at many tech firms.

While several loose ends remain, there are some clues as to what Ant's ultimate fate may be, at
least. The People's Bank of China last September outlined new measures for financial holding
companies that required them to hold "adequate capital" matching the amount of assets they
have, among other measures.

If Ant is now classified as one of those companies, that could mean it will either have to
significantly increase the amount of cash it holds in reserve, or otherwise slash the size of its
consumer lending business.

Even though the details of Ant's reported agreement have not yet been confirmed, it's easy to
see why these new rules might be a problem.

Ant held about 2.15 trillion yuan ($333 billion) worth of

consumer and small business loans as of last June,
according to its IPO prospectus. By comparison, more
than 4,000 commercial banks in China held just six
times as much in outstanding loans at the time,
according to data from the People's Bank of China, the
country's central bank.
Related Article: Alibaba is facing an
'existential crisis'
Against that huge loan book, Ant held just 16 billion
yuan ($2.5 billion) in authorized capital.

Beijing, meanwhile, mandates that "systemically important" banks, or those deemed too big to
fail, have enough money to cover at least 11.5% of their risk-weighted assets — a rule it adapted
from a widely used international banking guideline called the Basel Accord. Ant's balance sheet
falls far short of that ratio. (Notably, China's ratio is even stricter than that used by other countries
that follow Basel.)

Ant will have "less flexibility and innovative space," if it becomes a financial holding company,
wrote Ji Shaofeng, the chairman of the China Small and Micro Credit Industry Research
Association, in Caixin Global magazine last November after the IPO was pulled. He added that
the large amounts of consumer data that Ant has collected through its digital payments services
could also now fall under the watchful eye of regulators, potentially presenting further
challenges.

"For a tech company that needs constantly [to] innovate, such regulations will pose extremely
big pressure," he wrote.

Longstanding public tensions

This is exactly the kind of pressure that Ma, the co-founder of Ant and Alibaba, was worried
about when he landed himself in hot water with regulators late last year.

"The Basel Accord is more like a club for the elderly," Ma said during a speech in Shanghai last
October, his last before Ant's IPO was pulled and he largely retreated from public life.

"What it wants to solve is the problem of the aging financial system that has been in operation
for decades," Ma said. But while systems like Europe's are complex, he called China's financial
system an "adolescent" that is better served by innovative tech firms that can bring banking to
poor populations and small-time businesses that are otherwise locked out of traditional banks.

"The Basel Accord is about risk control," Ma added.

"But China's problem is the opposite. China doesn't
have systemic financial risks, because it basically has
no financial system."

The tech entrepreneur's choice of words during that

Related Article: Jack Ma was almost bigger
than China. That's what got him into trouble
speech grew even more colorful — he criticized China's
conventional, state-controlled banks for having a "pawn
shop" mentality — and likely spurred Beijing to act
swiftly in retaliation.

While the Shanghai Stock Exchange was cryptic at the time about the reason for pulling the IPO,
saying that Ant's listing had "major issues," the government's response since indicates that its
decision was about exercising authority and control.

"China's central planners' primary concern is that the party remains in control of all aspects the
economy and business sector," said Alex Capri, a research fellow at Hinrich Foundation and a
visiting senior fellow at National University of Singapore. "The rapid growth of Chinese tech
giants clearly diminishes the influence of state-owned banks and [other] financial institutions,
and that diminishes the power of the Communist Party."

Tencent's WeChat Pay — seen here at the China Retail Trade Fair in November 2020 — is Alipay's main rival.

China's tricky balancing act

Beijing's calculated crackdown on tech is rooted in economic concern just as much as
exercising control.

Authorities have long been incredibly wary about whether the influence that tech firms have over
the financial sector makes that industry vulnerable to structural risks. If any of the major players
failed for some reason, that could wreak havoc on China's economy.

"The idea is to have these firms more firmly under Beijing's control so that they can better serve
the state when it comes to building the next generation of [the Internet of Things] or financial
infrastructure or rolling out the digital [yuan]," Capri said. "All of these actions promote and
project Beijing's power."

But it's also a tricky balancing act. While Chinese

President Xi Jinping has long favored state-owned firms
over private ones like Alibaba and Ant, analysts point
out that those state companies are not nearly as adept
at driving productivity and innovation as their publicly
owned counterparts.

Related Article: Xi Jinping wants China's "There are legitimate concerns about financial risks and
private companies to fight alongside the
Communist Party anti-competitive behavior that justify greater oversight
of the tech giants," wrote Julian Evans-Pritchard, senior
China economist at Capital Economics, in a research
note last week. "But we think a desire to reassert control means that regulators are now
swinging too far in the other direction. This threatens to undermine the recent prop to economic
growth from rapid productivity gains in the tech sector."

That means Beijing will likely remain careful "not to kill the goose that lays the golden eggs,"said
Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics, who
researches financial tech innovation in China.

"There is widespread recognition of the importance of the super apps for China's innovation
ecosystem, hopes for international influence and status, and its economy," he added.

Fuller of the City University of Hong Kong agreed. If China wants to compete with the West, he
said, the country "has to pursue industrial and technology policies in a more e cient manner."

There is "a trade-o between promoting state ownership and innovation," he added.

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