Ant Group and TenPay Fined: One More Step To Regulation Closure

Ant Group was fined almost US$1 billion after a multi-year investigation and rectification process. Interestingly, information regarding the fine on Ant Group had been leaked several months ago, and it turned out to be accurate in terms of the amount. Although the information was not new, Alibaba, as a stakeholder in Ant Group, still reaped the benefits as its stock prices soared by 3.4% in Hong Kong and 8.1% in the United States following the official announcement.

This should not be read as a continuation of regulatory scrutiny. But rather, this signals near the end of it, and hence the rally in the share price of Alibaba. The wave of tech regulation commenced towards the end of 2020 when Ant Group's initial public offering (IPO) was abruptly canceled. It appears that Jack Ma was too audacious in his speech about challenging ‘outdated’ financial regulations.

What he got in return was financial regulations raining down hard on him and his companies. Ant Group, being a tech company, was an easy target for the regulators to discover it has been operating illegally without financial license. One example was Ant Group's Xianghubao (相互宝), a mutual insurance model that involved customers pooling their funds to provide insurance coverage to one another, bypassing traditional insurance underwriting processes. This mutual aid model was deemed too novel for regulators to accept, and Xianghubao was eventually wind down as part of the rectification works.

A lot more have changed since then, Jack Ma has given up majority control of Ant Group, and Ant has applied for a license but has yet to be granted. The delay in the process was due to the restructuring efforts undertaken by the regulators themselves. The People's Bank of China, the country's central bank, has is spinning off its financial regulatory responsibilities to a new entity called the National Financial Regulatory Administration (NFRA). This new institution will also absorb the functions of the China Banking and Insurance Regulatory Commission (CBRC). Li Yunze was just announced as the head of NFRA in May 2023. Thus, it has been a flux of changes and the license to Ant is unlikely to be granted until the dust settles.

Nevertheless, the regulators in China have kept to their words. At the beginning of the year, Guo Shuqing, the chairman of CBRC, openly declared that the crackdown on fintech operations had concluded. And indeed, there weren’t new regulations imposed on fintech companies ever since. Probably because China has economic growth issues to deal with and would need the help of the tech companies.

At the same time, Tencent’s fintech subsidaiary, Tenpay Payment Technology, was also fined about US$410m for violating institutional management regulations. Furthermore, four individuals involved in the matter were also fined.

Both Ant Group and Tencent have the financial capacity to bear these penalties. For Ant Group, the fine would represent around 23% of its net profit in FY22. As for Tencent, since it combines its fintech and cloud revenue, the specific net profits from this segment are not disclosed. However, to provide an indication, Tencent reported a net profit of $26 billion in FY22. Therefore, the fines imposed can be considered relatively minor. We believe that the management of both companies would be more than willing to pay the fines and move on.

What’s next?

There’s a Chinese belief: 解铃须用系铃人 and it is appropriate in this instance as Ant was the catalyst for the implementation of these regulations. It started with Ant’s failed IPO and it has to end with Ant’s successful IPO. But Ant’s IPO is unlikely to proceed until the authorities grant Ant Group its financial license. It is progressing but it has been slow.