Jack Ma's too-big-to-fail finance giant Ant Financial faces a clampdown

Alibaba founder Jack Ma speaks before a signing ceremony in Bangkok on April 19, 2018, during a visit to the country to announce an investment plan. PHOTO: AFP

HONG KONG (BLOOMBERG)- There's no other company on Earth quite like Ant Financial.

Spanning online payments, insurance, lending, credit scores, asset management and more, Jack Ma's Chinese behemoth resembles a mashup of PayPal, Geico, Wells Fargo and Equifax - with a bit of BlackRock thrown in for good measure.

Thanks to clever mobile apps and a burgeoning Chinese middle class, Ant oversees the world's biggest money-market fund and handles more than US$2.4 trillion (S$3.21 trillion) of mobile payments every three months. Many of the company's 870 million customers rely on it for nearly every aspect of their financial lives.

But Ant's extraordinary reach may soon expose the company to a major challenge: Chinese policy makers, worried that Ant and other financial holding companies pose systemic risks to the nation's US$12.7 trillion economy, are drafting new regulations that could make it much harder for the companies to grow.

The rules will force Ant and some of its peers that straddle at least two financial industries to obtain licenses from China's central bank and meet minimum capital requirements for the first time, according to people familiar with the matter, who asked not to be identified discussing private information.

The companies' ownership structures and inter-group transactions will also be restricted, the people said, adding that the rules need approval from China's State Council and are subject to change.

Ant was among the biggest beneficiaries of a freewheeling era in Chinese financial regulation that saw tech-savvy startups transform how the nation's 1.4 billion people spend, borrow and save. But China's government is now shifting into risk-control mode as it tries to prevent a record buildup of corporate and consumer debt from sinking the economy. Ant's growing role in the country's financial plumbing makes it an obvious target for authorities who've already shackled spendthrift acquirers and reined in the nation's sprawling shadow-banking system.

"Regulators have been a bit slow in reacting to Ant's meteoric rise, but the consensus now is that something must be done," said Dong Ximiao, a senior researcher at Renmin University of China in Beijing. "Ant has become too big to fail. Any mishap could lead to market or even social disorder."

The prospect of stricter oversight comes at a particularly sensitive time for Ant. The company is in the process of finalising a US$10 billion funding round and may soon embark on one of the most eagerly anticipated stock-market listings since Mr Ma took his e-commerce giant, Alibaba Group Holding, public in New York four years ago.

Ant is also grappling with growing competition from Tencent Holdings - the social media behemoth that's branching into financial services - and a more uncertain outlook for its international expansion after the collapse of a deal for America's MoneyGram International in January.

Ant, which was spun off from Alibaba in 2011 and is formally known as Zhejiang Ant Small & Micro Financial Services Group, said in response to questions from Bloomberg News that its "principle has always been to work closely with regulators and support the healthy development of China's financial sector."

China Investment Corp, the US$930 billion sovereign wealth fund that owns a stake in Ant, responded to questions by saying it's not involved in the company's management. Alibaba, which is entitled to a portion of Ant's earnings, rose 3.4 per cent in New York trading on Monday.

The People's Bank of China didn't respond to a faxed request for comment. While the central bank has never publicly detailed which businesses it considers financial holding companies, former PBOC Governor Zhou Xiaochuan said in March that regulators were considering new rules for the companies that may include minimum capital requirements.

When asked by Bloomberg News in March how the government plans to regulate Ant, Yi Gang, who succeeded Mr Zhou as PBOC governor seven weeks ago, said: "You will find out very soon."

To be clear, there's no indication that Mr Ma or Ant have broken any rules or landed on Beijing's blacklist.

While policy makers are right to consider tougher restrictions on the company, Ant "didn't run afoul of the government," said Oliver Rui, a finance professor at the China Europe International Business School in Shanghai.

Judging by the US$150 billion valuation under discussion in its upcoming funding round, Ant's investors don't seem particularly spooked. In fact, they have a fresh reason to be bullish after it emerged on Friday that Ant's pretax profit jumped by an estimated 65 per cent in the year ended March.

But that doesn't mean the company will go unscathed."In China the government tends to take a laissez-faire attitude, until you are big enough," said Chen Shujin, chief financial analyst at Huatai Securities Co in Hong Kong.

While some of Ant's units already fall under the purview of authorities including the central bank, the company isn't regulated at a group level and discloses little about its finances to the public.

The worry is that problems at Ant could go undetected and, in a worst-case scenario, put the stability of China's financial system at risk.

The company's outsized presence in the lives of ordinary Chinese adds to the argument for stricter oversight.

Zeng Jinping, a college student in Shanghai, is a case in point: The 23-year-old pharmaceuticals major uses Ant's payment platform for most of his big online purchases, puts his savings in the company's funds and borrows money from its consumer-lending arm.

"It's very convenient," said Mr Zeng, whose high credit score (also provided by Ant) entitles him to zero interest short-term cash advances, similar to those offered by credit-card companies.

Some of Ant's business lines have already faced tighter restrictions in recent months.

The company's Yu'E Bao money-market fund, which has more customers than the US has people, put a cap on daily subscriptions in February after coming under pressure from the central bank to limit inflows.

Two of Ant's consumer lending units tripled their capital buffers in December after the PBOC rolled out tough new requirements for the industry.

If China's leaders sign off on the financial holding company regulations, the likely upshot for Ant is lower leverage and slower growth.

The company's most important consumer loan business has a razor-thin capital adequacy ratio of around 2 per cent, according to an estimate from Orient Capital Research. That compares with the 10.5 per cent year-end regulatory minimum for China's smaller banks and the 11.5 per cent minimum for systemically important lenders.

Still, quantifying the impact on Ant and its competitors will be tough until details of the finalised regulations come to light.

The people familiar with the draft rules didn't provide specifics on capital adequacy requirements or a complete list of companies that will face oversight, though they did say companies subject to the rules also include Citic Group and China Everbright Group (both conglomerates didn't immediately reply to requests for comment).

What's clear is that regulatory scrutiny of Ant is intensifying, said Armstrong Chen, director for banking law and practices at the Shanghai Law Society. While that may ultimately put the company on a healthier growth path, it's likely to weigh on Ant's near-term results, Mr Chen said.

"Regulatory restrictions will likely cause some short-term pain," he said. "Unchecked expansion will no longer be possible."

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