How China lost patience with Jack Ma, its loudest billionaire

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Jack Ma’s spectacular Fall from Grace has been in development for years.

When Jack Ma took to a conference stage in Shanghai in October, China’s most famous entrepreneur was on the verge of launching an unprecedented $ 35 billion initial public offering for the financial juggernaut he co-founded two decades earlier. A listing on Ant Group Co. would value the company at more than $ 300 billion and increase Ma’s own fortune beyond the already $ 61 billion, cementing his position as the richest man in the country.

Ma, co-founder of e-commerce giant Alibaba Group Holding Ltd., China’s largest corporation, told the audience that day at the Bund Summit that he was torn, but that this was a “most critical” moment in the development of the company Finances. What followed was a 20-minute toast of anachronistic government regulation that would stifle innovation in China. It was a vintage performance by the famous, outspoken business executive known for his confident bragging rights and high-flying rhetoric. But this time, like Icarus, after getting too close to the sun, Ma was quickly brought back to earth.

Since September, the Chinese government has launched a coordinated crackdown on regulators that sank Ant’s public offering in November and, along with tough new antitrust rules, caused Ma’s Alibaba’s market value to drop by about $ 140 billion, or 17%.

In the meantime, the extravagant Ma has all but disappeared from the public eye. In early December, when his empire was under regulatory control, the man most closely identified with the meteoric rise of China Inc. was advised by the government to stay in the country, according to a person familiar with the matter.

While his wealth and influence is curbed, Ma does not face personal downfall, say those familiar with the situation who have asked for anonymity to discuss sensitive matters, as do other officials and executives that Bloomberg News has contacted for these History has spoken. Instead, his public reprimand is a warning that Beijing has lost patience with the overwhelming power of its technology moguls, increasingly viewed as a threat to the political and financial stability that most praises President Xi Jinping.

The empires built by Tencent Holdings Ltd. Chairman Ma, “Pony” Ma Huateng, and other tycoons, once hailed as the drivers of economic prosperity and symbols of the country’s technological excellence, are now suspect after hundreds of millions of users accumulated and gained influence almost every aspect of daily life in China. “The [Communist] The party is trying to make it clear that Ma is no bigger than the party, “says Rana Mitter, a professor at Oxford University who specializes in Chinese politics.” But they also want to show that China is a good place to do business, and that means the party has to show that entrepreneurs can be successful. “

It’s a precarious balancing act that Ma seemed to have mastered in his two decades at the helm of China’s largest e-commerce and financial technology company. Aware of an impending avalanche of rules, he shouted “pawnshops” to Chinese lenders, Internet regulators and the “old men” of the global banking community during his speech in Shanghai. The speech was seen as an attempt to deflect the impending regulatory onslaught and sparked an unprecedented series of events.

First came the world‘s largest IPO suspension, a nightly November 3rd announcement that baffled financiers from New York to Shanghai. A week later, the antitrust agency issued 22 pages of proposed antimonopoly rules, which many read as a veiled warning to Ma and other business owners to tone down the boast. There are also new guidelines in place for some large conglomerates like Ant that are in the finance space, as well as online lenders and insurers.

As the attacks intensified, China’s Politburo, the highest decision-making body of the Communist Party, stressed the need in December for greater antitrust scrutiny and the prevention of “disorderly capital growth” – a signal that private corporations can expect tighter controls.

Ma’s Imperium is in crisis mode. Its top executives are part of a task force that interacts with watch dogs almost daily. Meanwhile, regulators, including China’s banking and insurance regulator, are weighing which companies Ant should give up control in order to mitigate the associated risks to the economy, officials with knowledge of the matter said. They haven’t made up their mind whether to split up their various business areas, split their online and offline services, or take a different route.

Ant’s chairman Eric Jing was contrite in his first public address since the IPO. The company, he said on December 15, listened carefully to criticism and carried out a “comprehensive self-assessment”. Ant declined to comment on this story. China’s banking regulator did not respond to a request for comment.

At Alibaba, executives are concerned with antitrust legislation, which analysts say targets competitive tactics in e-commerce. The company is also not protected from the effects of Ant: Ant’s payment platform is used for most of Alibaba’s online transactions, and the lending services increase consumption on the sites.

Ma’s spectacular Fall from Grace has been in development for years. The former school teacher who built Asia’s largest digital enterprise embodies a generation of self-made entrepreneurs, from Tencent’s Pony Ma to the younger ones, including the founder of ByteDance Ltd., Zhang Yiming, and Wang Xing of Meituan. They have reconciled the sometimes conflicting demands of Beijing and powerful foreign investors for an extremely profitable private empire in communist China.

“Sometimes it’s hard to see and understand clearly where your limits are,” said Eric Schiffer, executive director of Los Angeles-based private equity firm Patriarch Organization, of Ma’s influence. “He has limits. This is President Xi. He won’t win this war.”

Ma has long cultivated his image as a rebel fighting the system and tearing down walls to protect state-owned companies. Again and again he emerged strengthened from the brawls. His companies have quarreled with a number of powerful entities – from government-backed giants to industrial regulators – many of which are now settling in his realm.

Ma first came to be known as the online retail genius behind Alibaba, which acquired and dispatched one of the leading US companies, EBay Inc., on its way to become China’s largest corporation. But it’s his second mammoth creation that got him in hot water.

Ant was born 17 years ago in dangerous circumstances, when China had not yet allowed private companies to operate in the financial sector. Using Silicon Valley’s PayPal Holdings Inc. as a model, Ma created the now ubiquitous Alipay service that paid for everything from loans to travel to McDonald’s deliveries. In the early days, he encouraged staff with promises like “If someone goes to jail, I will go,” which he recalled two years ago at the World Economic Forum.

Alipay thrived. The 2013 Quick Pay innovation was a hit with users. The service, which effectively created a payment book for 200 Chinese banks, simplified the online payment process, increased the success rate of online purchases by a third to 90%, and cemented Ant’s dominance in digital payments.

Its success has caused an uproar among local banks. “We’re not necessarily interested in buying a bank to change it. But because we stalked it, it reformed,” Ma said in a 2017 Bloomberg Television interview. “If a tiger is following you, you can run a lot faster than you thought. “

Next, he envisioned a line of business that would “shake things up” in China’s highly regulated state banking sector. Ant created the Yu’ebao money market fund – or “Leftover Treasure” – which requires balance as little as 1 yuan (15 ¢) and allows withdrawals at any time. Its launch in 2013 was part of his goal of creating a more transparent financial system that would disrupt the banks that had sucked in cheap deposits and achieved attractive net interest margins for years. Again he reassured the employees with his line “You concentrate on getting the job done. If someone has to go to jail, I am the one,” said the book by Chinese author You Xi about the company.

Gambling has paid off. In less than a year, its assets under management grew to 100 billion yuan ($ 15.3 billion) and 30 million users signed up. Yu’ebao would continue to amass $ 270 billion, making it the world‘s largest money market fund.

Ma once again drew the ire of the banks, who held emergency meetings to discuss tactics to curb Ant’s expansion. Niu Wenxin, a prominent commentator on China Central Television, attacked Ant on his blog, calling it a “vampire” and a “financial parasite”.

Soon after, regulators, concerned that government-backed banks would be crippled by an exodus of deposits and the vast amount of money sloshing around outside of the central bank’s jurisdiction, stormed to curb the inflows.

Ma made a pithy public statement accusing banks of manipulating people’s freedom of where to place their deposits. But he underestimated the power of China’s state-owned companies, whose appeals to regulators resulted in Ant’s activities being restricted by rules.

Former Governor of the People’s Bank of China, Zhou Xiaochuan, admitted in 2016 that, as a shadow lender, Ant had lower capital requirements than traditional banks. “So you know that there are signals for many others to follow. Sooner or later, I think we will look at this issue in order to have an equal competition,” he said in an interview with Christine Lagarde, which it was then chairman of the International Monetary Fund.

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Ma’s Lieutenant Lucy Peng, when she served as Ant’s CEO, convinced the company to take over the oversight. Ant focused on playing matchmakers between financial institutions and its hundreds of millions of payment customers. The platform now sells mutual funds for more than 20 asset managers and has worked with around 200 credit banks.

Around the time Yu’ebao was making waves at home, Alibaba was making news in New York, which was the largest IPO in the world in 2014. The stock rose 38% on day one. In an interview with CBS News that aired shortly after the IPO, Ma said his method of dealing with authorities was to “never do business with the government. To be in love with them, not to marry them”.

By January 2015, Ma’s already cool relationship with the Chinese authorities hit a new low. The state administration for industry and commerce released a report accusing Alibaba of harboring shady traders, selling counterfeit products and even accepting bribes and false advertising. The company has had a “credibility crisis”.

The damning report followed Ma’s appearance at the World Economic Forum in Davos, Switzerland, where he said he would never share user data with Beijing unless it investigates terrorism or other crimes. And it came the day after a letter addressed to the agency appeared on one of Alibaba’s official Weibo accounts complaining that government inspectors were applying standards inconsistently and not giving traders enough time to respond to allegations. The increasingly heated dispute shook investors and caused Alibaba’s share price to fall.

To contain the crisis, Ma visited at least three regulators, including a speech at an internal meeting of the China Securities Regulatory Commission. In it, he recognized the need to tighten supervision and pleaded with regulators, arguing that Alibaba is not “too big to fail”.

The Industry and Commerce Watchdog gave in and issued a letter later that month saying that the views of certain officials were not shared by the administration, ending the conflict. A report criticizing the company had no “judicial effect”.

The episode boosted investor confidence in Ma’s ability to navigate regulatory waters. For a while he seemed to have found the right balance when it came to fighting guard dogs.

“When you step into new fields without clear rules, it’s always painful. You say, ‘Hey, my job is to regulate, not to innovate. This is your job,'” Ma told Bloomberg TV in 2017. “We had terrible trouble experiences, but we learned how to work with regulators.”

The peace was broken in September this year ahead of Ant’s initial public offering. At a time when China’s banks were sacrificing profits to support a coronavirus-ravaged economy, heavyweight investors were lining up for part of the financial services powerhouse.

When plans for the $ 315 billion offering emerged, regulators urged a series of coordinated measures to curb it. Beijing blessed the sudden halt to an IPO designed to trumpet China’s independence from the US capital markets. “It is not new for the party to regulate everything, including private companies and especially private finance companies as specifically set out in the Chinese Constitution,” said Zhiwu Chen, finance professor and director of the Asia Global Institute at the University of Hong Kong. “But many private business people didn’t take it seriously. The latest Ant episode was a wake-up call.”

On November 2, days before Ant’s planned IPO, Ma and his top executives were issued a warning in front of the country’s major financial regulators in Beijing. The listing was stopped the following day.

A joint task force was set up to oversee Ant, led by the Financial Stability and Development Committee, a regulator for the financial system, as well as various departments of the Central Bank and other regulators. The group is in frequent contact with Ant to gather data and other material, investigate the restructuring, and develop further rules for the industry.

While Ant was not given specific guidance on an overhaul, the overall message for the company is to rethink its business, adhere to new rules, and follow the line of scrutiny for conglomerates operating in more than one financial sector.

In doing so, Ant will need billions in additional capital and will likely lose one of two licenses it can use to operate its microcredit platforms: Huabei (or “Just Spend”) and Jiebei (“Just Lend”). The most lucrative deal, with consumer credit worth around 1.7 trillion yuan as of June, will find less willing partners in banks and other countries as regulators criticize the relationships in which traditional lenders bear all of the risk.

Institutions have been told to report on their joint lending with Ant, with some already trying to reduce that risk. Ant has stated that it only kept about 2% of the loans on its own balance sheet through June, with the rest being financed by third parties or packaged and sold as securities. “Fintech is a” winner takes all “industry,” said Guo Shuqing, China’s leading banking regulator, at a conference in December. “Taking advantage of the data monopoly, large technology firms tend to impede fair competition and seek excessive profits.” Guo also pledged to “encourage innovation while improving risk control”.

Ant’s own task force dealing with regulators, including Jing, its chairman and CEO Simon Hu, kept officials up to date on the lines of communication almost daily. Executives await final online lending guidelines and prepare for further oversight in sectors such as insurance and wealth management.

The expected changes have reduced the chances of Ant reviving its initial public offering before 2022, according to those familiar with regulatory thinking. Company executives remain optimistic that they can pacify the watchdogs again and move on, according to people familiar with the company.

No tech mogul has made it in China without defying regulators or stepping over their ever-changing boundaries. Wang’s pre-Meituan company, Twitter-like Fanfou, was shut down in 2010 after it was accused of inciting violence in Xinjiang. In 2018, ByteDance’s Zhang released his first breakout hit, a seemingly innocuous app that rounded up jokes that were judged to be too uncolored. Beijing nearly frozen Tencent’s gaming empire, the largest in the world, in the same year after President Xi’s administration blamed addicting blockbusters like Honor of Kings for myopia among teenagers.

Ma’s absence from the public – he hasn’t made any speeches since regulators stopped Ant’s initial public offering – is in sharp contrast to his previous jet setting life of being extravagant during Alibaba’s annual singles day shopping extravaganza or with Nicole Kidman exchanged lighthearted jokes even in his own Hollywood-style film productions.

Ma, a supporter of the legendary martial arts writer Louis Cha, starred three years ago in a short film as a kung fu master who sends out the world‘s best martial arts gurus in the Bruce Lee style. But the film ends with the Chinese police berating him for not knowing his place and trying to be number 1. A humble ma falls on herself and apologizes.

The film should show Ma’s humorous side. But it also brought home the inconvenient truth that one of the richest businessmen in China will always be at the mercy of the ruling Communist Party.

“The current practice is only the closest group of business people to be reminded by the government,” You can be rich. You can have a strong company. But you have to stick to our rules, “says Andrew Polk, co-founder and head of economic research at Trivium China, a Beijing-based consulting firm.” To me, it’s less of a surprise that Jack gets his Comeuppance than a surprise that it took so long. ”

(Except for the headline, this story was not edited by GossipMantri staff and published from a syndicated feed.)

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