On Monday, September 13, Chinese authorities unveiled yet another round of crackdowns against e-commerce, fintech and the cloud leader Ali Baba (NYSE: BABA). A year ago, Alibaba was the starting point of the regulatory crackdown on Chinese tech giants, when regulators canceled the IPO of Alibaba financial subsidiary Alipay following inflammatory comments from the company. founder Jack Ma.
Nearly a year later, Beijing returned to the subject of Alipay, with a new plan for the fintech giant. This will involve a break-up, the arrival of the government as an investor and the delivery of proprietary data.
What is Alipay?
Alipay combines an extensive digital payment platform with other traditional financial products such as loans, wealth management and insurance. Before the regulatory crackdown, Alipay used data from its payment platform and Alibaba’s main e-commerce platform to assess customer credit for loans. Outside banks would finance the loans, so Alipay would not bear any credit risk.
According to the most recent figures, Alipay has more than 1.2 billion users in total, while its Huabei credit card platform had 190 million users and its Jiebei installment loan product 500 million. users. These unsecured loan products are what annoyed Chinese regulators, especially as loans reached $ 271 billion in the first half of 2020.
What are the authorities doing
Chinese regulators are increasingly concerned about an out of control boom in spending and leverage in the country’s economy. Large real estate developer Evergrande (OTC: EGRNF) is in serious trouble, which could pose a contagion risk for the rest of China. Therefore, China is also seeking to crack down on the leakage of consumer loans. This includes Alipay’s products, which are underwritten outside the jurisdiction of central banks and other government-controlled financial institutions.
The authorities are proposing to divide Alipay into essentially three different companies. One will merge the loan products of Jiebei and Huabei into one separate entity, another will be the credit rating arm of Alipay, and the rest will be the payment platform and other products.
Reported in June, the new loan company will be called Chongqing Ant Consumer Finance Co. It will be 50% owned by Alipay, with the remaining 50% coming from other companies, including some state-owned banks. The new company will also be responsible for up to 30% of the loans it issues, which means the new company will have to hold more capital on its balance sheet and will likely earn a much lower valuation in the market.
But again this week, regulators said they would also require these products to be in an entirely separate application, according to the Financial Time.
Alipay also waived the data
Separately, Alipay will likely also have to transform its credit rating wing into a new joint venture that will also share with public entities. Reuters announced that Alipay would retain only a 35% stake in the new joint venture. The joint venture will also apply for a credit rating license, which has so far only been granted to public entities. Clearly, Beijing wants to tear down the “walls” around Alipay’s vast treasuries of payments and e-commerce data that have enabled it to get loans in a unique way.
What are the consequences ? The Financial Time also signaled that the central bank of China wants bank and fintech lending decisions to be made only by approved credit rating entities, and not by proprietary data beyond the reach of the central government. This could mean that Alipay’s competitive advantage in lending decision-making could disappear, as all lenders will have to follow the same rules for rating potential borrowers.
What does this mean for Alibaba shareholders going forward?
Alibaba only owns 33% of Alipay, so the headwinds of Alipay’s growth probably don’t justify Alibaba’s 50% haircut. And it’s not like Alipay is leaving; it’s just that its growth and profitability can take a hit. It might not even be so bad if new rules manage to bring macroeconomic financial risk under control, while also allowing Alipay to eventually proceed with its IPO.
However, Beijing is also targeting the barriers that Alibaba erected as an e-commerce pioneer. This week, Beijing ordered major internet platforms to open their ecosystems to competitors, instead of blocking links to them. And of course, earlier this year Alibaba was fined $ 2.8 billion for forcing brands into exclusive deals to access its large ecommerce platform.
Basically, Beijing seeks to break down various trade “ditches” that it deems somewhat artificial, or at least the result of monopoly power, not genuine innovation that benefits the consumer. Unfortunately, it appears that in e-commerce and fintech, Alibaba may be the biggest offender, or the biggest user of its monopoly power to strengthen its competitive position.
Alibaba’s stock has fallen enough to the point where it may have incorporated all of this bad news into the current low price; However, investors should be aware that in the future the competition for new business will be much tougher than it has been in the recent past.
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