Nearly all Chinese entrepreneurs don’t have happy endings,” Jack Ma told a group of private sector businesspeople back in 2011.
Perhaps a few of Ma’s counterparts should have paid more attention to his remarks. Not long ago the bosses of Chinese conglomerates Wanda, Anbang and HNA were lauded as high achievers. They were making a major splash by pushing outbound investment to record levels, until their rainmaking clout dried up with Beijing’s crackdown on cross-border M&A in 2017. Both Wanda and HNA have struggled financially since then. The outcome was much worse for HNA’s co-chairman Wang Jian, who fell to his death during a European trip in 2018 (see WiC417). Anbang has effectively been nationalised and its founder Wu Xiaohui is serving an 18-year jail term (see WiC399).
Now it’s the fate of Ma himself that is a hot topic in business circles. Last weekend his firm Alibaba was handed the heaviest antitrust fine in Chinese history. And investors are worried that the government is set to take on the country’s other internet heavyweights, reprising the way that it knee-capped the small group of China’s most acquisitive firms back in 2017.
What’s the antitrust fine about?
Chinese regulators began an antitrust investigation into Alibaba at the end of last year. After a four-month study, the results were announced on April 10 and the State Administration for Market Regulation (SAMR) imposed a fine of Rmb18.2 billion ($2.8 billion) on the internet group, equal to about 4% of its sales in 2019.
This is the biggest fine handed out by the anti-monopoly regulator, and nearly three times the amount that US chip designer Qualcomm coughed up in 2015 when it was found guilty of breaking Chinese competition law.
In a detailed statement, SAMR noted that although Alibaba’s share of Chinese e-commerce sales had dropped from 76% in 2015 to 62% in 2019, it still enjoyed a dominant market position because of its combined strength in supporting sectors such as payments, cloud, Big Data and logistics.
As a result, Alibaba has one of the stickiest client bases, both in terms of retailers and consumers. SAMR concluded that Alibaba had been abusing its dominant position and imposing a so-called “pick-one-out-of-two” practice on merchants doing businesses on its platforms. For example, retailers who did business with Alibaba were forbidden from setting up shop on rival e-commerce platforms such as JD.com and Pinduoduo. It said this wasn’t spelled out in a contract, but Alibaba might discourage retailers from breaching the unwritten exclusivity rules by imposing penalties, such as lowering their positions in its sales search rankings.
SAMR has demanded that Alibaba set up a new reporting channel that identifies new measures they impose on retailers. There is a requirement for a new dispute-resolution mechanism as well. Alibaba must report back with a rectification plan by the end of this month and has committed to an annual “self-inspection report” for the next three years.
“We accept the penalty with sincerity and will ensure our compliance with determination,” it promised in an open letter. “It is an important action to safeguard fair market competition and quality development of internet platform economies.”
Was the review about more than just the antitrust situation in the e-commerce market?
SAMR’s penalty follows a campaign that started in November last year when the regulator published draft rules to curb monopolistic behaviour among China’s major internet platforms.
Alibaba’s sister firm Ant Group has been under pressure to rejig its fintech business model too. Just two days after SAMR’s ruling, financial watchdogs including the PBoC, CBIRC and CSRC arranged yet another meeting with Ant’s senior executives. In a stock exchange circular in Hong Kong, Alibaba said Ant Group was also being overhauled – and was set to become a “financial holding company” to ensure that its financial businesses are “fully regulated”.
In essence, that means the fintech firm will come under the direct oversight of the likes of PBoC and CBIRC in the same way as more conventional financial services firms.
This is another major reversal for Jack Ma. In comments at the Bund Finance Summit immediately prior to Ant’s abortive IPO last year, he had highlighted how Ant’s lending platform was a very different model to that of the traditional lenders. Today’s banks have “a pawnshop mentality,” he complained, and regulating his fintech operation in the same way as a conventional lender was “yesterday’s way to manage the future”.
That brave new world is now being barred to Ant. Instead the company will be “returning to its origin” in the digital payments business, the company statement said, serving consumers and SMEs by “focusing on micro-payments and bringing them convenience”.
The PBoC’s vice governor Pan Gongsheng went into more detail on the new demands being made of Ant. In a Xinhua article, Pan said Alipay’s payment service would be disconnected from Ant’s microloan and wealth management products – the lending unit having been accused of encouraging young consumers to borrow beyond their means. Ant should also “rectify” its behaviour in other areas, he said, such as managing the liquidity risks of its business better and even downsizing the cash balances in its money market fund Yu’ebao.
There was also criticism of Ant’s “information monopoly” – i.e. its oversight of payments data and related information on consumer behaviour. This would also have to be broken up to protect “individual and national data security,” Pan warned.
There was no direct mention of whether Ant or Alibaba will be compelled to share its sensitive consumer data with the Chinese government. Nor was there a clear indication that Alibaba will have to sell down a portfolio of media assets said to have made the government uncomfortable, such as stakes in Sina Weibo and the publishing group Yicai.
Pan added that the changes at Ant are being guided by principles that emerged during several high-level government meetings, including the Fifth Plenum in October and the year-end Central Economic Working Conference.
In these summits the tasks of “tackling monopolies” and “preventing disordered capital expansion” were ordained as key policy goals for regulators.
More focus on ‘stability’?
Financial stability has been a frequent refrain from senior officials since early 2017, after Chinese President Xi Jinping equated it with China’s national wellbeing. “Financial security is an important part of national security,” he was quoted as saying during a meeting of the Politburo, a senior decisionmaking body.
A campaign to rein in international investment by some of China’s most high-profile companies then began in earnest. The most acquisitive firms turned out to be the most leveraged too. And for China’s political leaders, the overseas spending sprees were suspicious – with links to deliberate efforts to move assets out of the country, as well as piling up debt that threatened to unsettle China’s financial system.
The ensuing crackdown reversed the fortunes of tycoons such as Anbang’s Wu and Wanda’s Wang Jianlin. Wanda, a conglomerate based in Dalian, has been in divestment mode for five years and is now relocating some of its businesses to Zhuhai in a bid to stay afloat (see page 7). Anbang has been completely dismembered, with Dajia Insurance, a state-owned firm, taking on its surviving assets. It was reported earlier this month that the government is now trying to find private sector investors to take Dajia over.
The Financial Stability and Development Committee was set up (under the State Council) in early 2017. Since then, the central government imposed fuller oversight on larger companies that have “entangled financial interests”. The enforced restructuring at Ant (into a financial holding company) is part of the same policy thinking, so it would be wrong to say that Ant and Alibaba have been singled out as special cases.
This emphasis on market order and financial stability has grown as tensions between China and the US escalated in recent years. The Chinese Communist Party also celebrates its 100th anniversary this year, making stability even more of a watchword on the policymaking agenda. As such the government is keen to deflate risks in the banking system amid concerns that a stand-off with Washington could result in a financial crisis. Property developers have also been brought into line with the “three red lines” restrictions on their ability to raise new debt (see WiC528). Last month China Financial, a magazine run by the central bank, even argued in favour of a new “Financial Stability Law” to fend off systematic risks further.
Alibaba isn’t the only target?
Ant Group is not the only fintech that has failed to get a lucrative listing in the A-share market. JD Digits, the fintech unit of JD.com and a rival to the Alibaba-Ant ecosystem, confirmed last week that it had shelved a plan to go public on Shanghai’s tech-focused STAR Market as well. Noting the treatment of its rival Ant, JD Digits also announced a business restructuring, including a name change to JD Technology with a greater focus on AI and cloud computing. It is planning to set up a financial holding company to comply with the new regulatory rules.
What’s also apparent is that companies with fintech ambitions are finding it harder to get onto the STAR Market in Shanghai, where the listings commitee is favouring tech companies with more tangible capabilities in hardware (and related IP) such as chipmakers and robotics firms. Healthcare companies are another favourite sector for market watchdogs. But fintech firms aren’t as popular, nor some of the biggest companies in the so-called ‘platform economy’ that rely on monetising China’s massive online population in areas like streaming.
IPO applicants with these business models have often opted to look instead at listings in New York or Hong Kong. In fact there are only two ‘internet platform’ businesses that have been able to list on the A-share market. One is the now defunct internet TV unit of LeEco. The other is People.cn, the internet portal run by the staid but stable People’s Daily.
All of this indicates that Ant and Alibaba won’t be the only companies coming in for scrutiny. And indeed the SAMR summoned executives from 34 internet firms to an “administrative guidance meeting” on Tuesday, warning them to “be in awe of and abide by the rules”.
They were also given a one-month ultimatum to remedy breaches of market competition orders or face severe penalties. “Tax-related violations and non-compliance practices, such as forcing merchants to choose one from two platforms, abusing market dominance, implementing mergers and acquisitions to drive out competitors, and burning money to grab the market for community group-buying [a new e-commerce trend we first identified in WiC521] must be seriously rectified,” the Global Times reported.
Will Jack Ma regain his influence?
If the People’s Daily’s verdict is anything to go by, Alibaba’s shareholders shouldn’t worry too much about Ma’s fate. “Pulling sleeves is also a show of caring,” a much-forwarded op-ed claimed last week. ‘Pulling sleeves’ is jargon among Party cadres for constructive criticism they give one each other. Perhaps that’s why Alibaba’s share price has rebounded strongly this week, although investors were also relieved that the fine wasn’t greater.
Ma has been keeping a low profile since last November. He is no stranger to political pressure, either, like the period in 2011 when Alibaba was mired in controversy over its handling of the transfer of its ownership of Alipay (see WiC112). Ma was under massive scrutiny from both the Chinese government and Alibaba’s major investors, including Yahoo and Softbank. In the middle of the crisis he shaved his head and then refused to meet journalists for more than a year. That was when he warned fellow entrepreneurs that they should not expect a “happy ending” either.
Ma expounded further on this comment in an interview with Esquire magazine two years later, saying he was speaking from a historical perspective. In that context, he claimed the most notable exception to his rule was Fan Li, a close aide to King Goujian of Yue some 2,500 years ago. Fan helped Yue defeat the rival state of Wu, before retiring from politics on a high, going into business and becoming fabulously wealthy.
Ma wasn’t as positive about his own prospects.
“I already know how my own ending will play out. This is why I am optimistic on what is happening to me. Let’s do it… That’s life. You know the ending is pessimistic but you carry on. That’s what the real masters do,” Ma told the magazine in a rather philosophical confession.
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