An apocryphal Chinese proverb goes that an ant may probably destroy an entire dam. Someone in China is, perhaps, taking this very seriously. In mid-December, a closed-door conclave of top bankers and the Chinese Communist Party leadership convened, to chart the agenda for the nation’s financial sector. Policymakers pledged to strengthen anti-monopoly supervision and curb “disorderly capital expansion” in 2021. The statement appeared to be aimed at fin-tech majors.
Following this, Alibaba has been feeling the heat. The State Administration for Market Regulation, an agency that regulates competition, began an anti-monopoly inquiry against e-commerce major Alibaba Group Holding on December 24, responding to allegations that the company requires vendors to list products exclusively on its platforms.
In another development, executives at its Ant Group, Alibaba’s finance services unit, were summoned for talks by China’s central bank and other regulators. A People’s Bank of China official said the Ant Group’s corporate governance was “not sound” and ordered it to “return to its origins”, as a payment services provider. The central bank official added that Ant must “strictly rectify illegal credit, insurance and wealth management financial activities.” Ant divisions offering these services are the business’s fastest growing and most profitable operations.
The bad news hit Alibaba’s shares. Alibaba’s co-founder Jack Ma is, perhaps, the poster boy of China’s ‘socialist market economy’. From hawking goods to founding e-business giant Alibaba, Ma who has a net worth of around US$65 billion, is the personification of Deng Xiaoping’s maxim: To get rich is glorious. He founded Alibaba with friends in a flat in Hangzhou in 1999 and persevered for years to get it off the ground. Later, the company ushered e-commerce to China. He was also thought of as a loyal Communist Party cardholder. Ant’s success even drew investment from the private equity firm founded by former Chinese President Jiang Zemin’s kin.
Ant began as an electronic-payments service in 2004, but over the years, it has morphed into an online financial services mall. It connects its 730 million monthly users with banks, insurers and wealth managers, to secure loans, insurance policies and financial investment products. While 2020 was being bemoaned for unleashing havoc, it was to be Ant Group’s take-off year. Ant was hoping to rake in US $35 billion from an IPO, surpassing Saudi Aramco’s debut on the bourse in 2019, underlining the new thinking that data is the new oil. But Ant had to shelve the IPO that was to be shared between the Shanghai Stock Exchange and Hong Kong.
Beijing’s action against Ma’s companies was likely to have been sparked by a speech he gave to the Bund summit in Shanghai, where top bankers met in October. Ma reportedly said, “We should not use the way to manage a train station to regulate an airport…It is impossible for the pawnshop mentality to support the financial demand of global development over the next 30 years.” China’s Vice-President Wang Qishan attended the conclave along with China’s central banker Yi Gang, and senior officials from the finance ministry. The normally taciturn CCP chose to weigh in on the matter with what was seen as a rebuke to Ma. At the conclave, Wang cautioned the financial sector to steer clear off the “wrong” path of self-circulating financial bubbles and Ponzi schemes and instead, urged the industry to focus on preventing financial risk.
It was apparent that Ma had riled the CCP, as he and Ant’s top brass were summoned by regulators. On October 31, a special session chaired by Vice Premier Liu He to study the fin-tech sector resolved to put in place “adequate supervision” to handle risks. Regulators sought curbs and regulation on the fin-tech industry. They wanted that loans extended to a single individual should not exceed 300,000 yuan (US$45,000). They also sought that companies involved in online loan businesses must meet strict regulatory requirements. The central bank warned that a major company in the fin-tech sector had become “extremely big,” posing systemic risks. Jack Ma incurred the ire of trolls even on the much-policed Chinese social media, implying that the online campaign against him had the tacit approval of the authorities. The CCP was, thus, making a case to keep its tycoons in line.
Ever since businessmen began to be admitted into the CCP, there has been some unease. New-age entrepreneurs who are feted globally, sometimes get in the CCP’s cross hairs. Gone are the days when proximity to power brought the rich immunity from getting on the wrong side of the law. Wu Xiaohui, who once headed insurance and finance major Anbang, received an 18-year prison sentence for graft in 2018. Wu was said to be among China’s most politically connected businesspeople, having married Deng Xiaoping’s granddaughter. China Telecom’s Chang Xiaobing was sentenced to six years in jail in May 2017 for bribery. In China, the line between state-led and private sector has become blurred over the years. Many businesses, like Big Tech, have flourished on the back of state patronage, subsidised land or support in the form of easy loans. Over the recent years, there have been calls for improving the CCP writ over the private sector to realise China’s rejuvenation.
Rising wealth gap
The CCP seems unhappy with the flashy lifestyle of the nation’s tycoons, amidst the rising wealth gap in China. President Xi Jinping wants them to have a sense of responsibility for the country and fuse the development of their fledgling businesses with the nation’s prosperity. While lauding the role of patriotic entrepreneurs in building modern China, he cited the examples of Rong Yiren and Wang Guangying. After the founding of the People’s Republic, “red capitalists” like Rong and Wang were said to have “handed over” their family wealth and businesses to the nation. Ma’s success led to many tech entrepreneurs in China following in his footsteps. Xi wants them to emulate the likes of “selfless” Rongs and Wangs, not swashbuckling Mas. The CCP has reminded the captains of industry that it can pull the rug out from under their feet at any time.
However, such capricious behaviour does not augur well for China and raises many questions about state-business relations. For starters, speculation swirling about the “disappearance” of a prominent magnate like Ma following a minor fracas with the nation’s top leadership does not boost confidence in its business climate. Xi has accorded top priority to building a framework of governance based on rules by 2025. Such a system is supposed to safeguard legitimate rights and empower a legal system that is responsive to businesses and make rules predictable. Episodes like this are a setback to China’s efforts to foster a robust legal culture.
From this year, China plans to bring out a paradigm shift in its economic model, making domestic consumption the main driver of economic growth. China hopes that this switch will funnel more investment into its companies involved in production of consumer durables, considering the size of its middle-income population. It believes that in due course, the nurturing of an innovation-driven ecosystem will also attract foreign capital in technology-based firms. However, ‘competitive neutrality’, which provides a level-playing field to both private firms and state-owned enterprises, is key to foreign capital. With the government planning to push its own digital currency, the game in the digital payment sphere may get lopsided putting private players at a disadvantage.
At a time of economic contestation between China and the US, the former is trying to create more gateways to channel investment from abroad into the capital market, and give foreign firms easier access to the country’s securities sector. A record US$119 billion was raised at the bourses in Hong Kong and on the mainland in 2020. However, questions will remain over the safety of investment in light of the Ant imbroglio.
The writer is Fellow with Strategic Studies Programme, ORF, Mumbai.
Observer Research Foundation