By Chan Kung and He Jun*
China’s push to rectify Ant Group could be deemed as the beginning of the country’s actions on tech giants. Since the Ant Group IPO was called off in early November, regulators have interviewed Ant Group twice. On December 24, an investigation team from the State Administration for Market Regulation (SAMR) completed an on-site investigation; on December 27, a central bank official issued a statement on the interview. The statement stopped short of calling for a split, but stressed that “Ant Group needs to fully realize the seriousness and necessity of the rectification and draw up a timetable for the rectification plan and its implementation”.
The regulator also ordered Ant Group to overhaul its fintech businesses, including wealth management, consumer lending, and insurance businesses, and to focus on the payment business. Ant Group shall form a financial holding company in accordance with the law, strictly implement regulatory requirements, ensure adequate capital, and establish the compliance of its connected transactions.
From a single policy standpoint, there is no problem for the Chinese government to “rectify” Alibaba and its affiliates in the name of anti-monopoly and preventing financial risks. The development models of Ant Group and Alibaba’s e-commerce are problematic that they pose significant financial risks, and the e-commerce model has had an impact on brick-and-mortar businesses. However, the timing and approach of the policy promulgation remain worth exploring while implementing enhanced regulation and rectification. It is necessary to objectively assess the “lethality” and future impact of policies for the rectification that has already been initiated in order to better improve regulation in the future.
As it stands, the rectification of the Internet giants will have the following effects:
First, China’s tech giants have taken a hit in the capital markets. It is a fact that China’s once-proud tech giants have been hit hard by the rectification, with their share prices and market values plummeting. Alibaba’s share price fell by more than 13% in the two trading days of December 24 and 28, wiping out about RMB 600 billion in market value as a result of the investigation team’s presence in Alibaba’s office for on-site investigation. Other tech giants such as Tencent, Meituan, and JD.com also suffered consecutive share price declines: Meituan and Tencent fell by more than 9% in two trading days, while JD.com also fell by more than 4%. As of December 29, the share prices of Tencent and Alibaba were still lower than the closing prices that plunged after the antitrust crackdown on December 14. UBS recently published a report predicting the Mainland China’s internet industry to continue this year’s regulatory situation next year, and the recent regulatory requirements have exceeded market expectations, hitting Alibaba harder at this stage. Will tighter regulation lead to capital flight from this industry? This remains uncertain.
Second, the rectification will significantly change the valuation of Chinese internet companies in international markets. What is certain is that the regulations and restrictions will change the business models of Alibaba, Ant Group, and other similar companies, affecting their ability to expand and profit. Ant Group, for example, saw its valuation nearly halved from US$280 billion at the beginning of November to USD 140 billion after its IPO was suspended and regulators introduced the Interim Measures for the Administration of Online Microfinance Business (Draft for Solicitation of Comments). In addition, the “Antitrust Guidelines for the Platform Economic Industry (Draft for Comments)” released in November, as well as the online deposit regulation and antitrust policies since December, will further limit Internet companies’ prospects of business expansion and earnings growth in the eyes of the international market, driving valuations down further.
Third, China’s internet application industry, which relies on its population and domestic market, will face a stricter regulatory and development environment in the future. Internet giants that have expanded rapidly in the past are expected to grow at a slower pace in the future. In the new regulatory environment with more compliance requirements, these giants will have to reduce their business leverage and may need to demonstrate more solid business capabilities in order to gain sufficient capital appeal. Some market participants jokingly claimed that China’s tech giants being hit like this is something that beyond the reach of Donald Trump and Mike Pompeo, but was accomplished by the recent strict regulation.
Fourth, the policy environment for the development of the internet industry will undergo systematic changes. After this incident, we believe that the supervision of the internet industry in China will be more stringent than in the past. What needs to be noted is the balancing of regulation and development, compliance, and efficiency. This depends on the awareness and supervision level of the government and regulatory departments.
It should be pointed out that the current regulatory changes have brought about a new problem, i.e., the country can regulate the internet industry with “rectification”, but how to promote development while regulating in the future is a question that neither regulators nor enterprises can avoid. Researchers at ANBOUND believe that the following aspects deserve attention:
First, regulation needs to be balanced and appropriate; this is true to both enterprises and relevant departments. Objectively speaking, the regulation in the field of P2P and internet finance is a typical example of the dilemma in the country in terms of regulation. The financial regulators are accountable for the current situation. Therefore, the regulatory authorities need to avoid the “regulatory confluence” of internal regulation and external pressure in the next step, which would be counterproductive.
Second, data and network traffic can be considered as the focus of regulation. Researchers at ANBOUND have repeatedly stressed that in the internet era, network traffic economy is the core of the Internet economy, and the public nature of network traffic platform should be attached importance to the Big Data platforms with platform nature such as Ant Group, Tencent’s TenPay, and WeChat. The key to the regulatory system is to clarify the ownership of the rights of Big Data and enhance the security of public information owned by the network traffic platform. It needs to be clear institutionally what kind of data the platform can collect, what kind of data it needs to report on a regular basis, and what kind of use rights it has in certain businesses such as advertising. Regulating monopolistic network traffic platforms in some areas will have long-term benefits for the future development of the Internet industry. In terms of practice, the government can focus on the management of big data platforms and promote related institutional measures, such as moderate shareholding in internet enterprises based on the management perspective, or set up a corresponding independent data management agency to protect the independence of public data while limiting the scale of the network traffic monopoly, and to avoid the new “too big to fail”.
Final analysis conclusion:
The “rectification” of Alibaba and its affiliates has already had a clear regulatory effect, causing “lethality” to them in the capital market, with subsequent impacts gradually emerging in the market. Regulators need to monitor policy implications from a developmental perspective in a geopolitical context. The supervision of the internet industry can be centered on the network traffic economy and focus on the proper control and intervention of data platforms with public attributes.
*Founder of Anbound Think Tank in 1993, Chan Kung is one of China’s renowned experts in information analysis. Most of Chan Kung‘s outstanding academic research activities are in economic information analysis, particularly in the area of public policy.
*Mr. He Jun takes the roles as Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy.