HONG KONG -- On the screen, a 37-year-old man was celebrating her daughter’s birthday with a huge meal and lots of gifts. At the bottom of the commercial, a line of words told, the man bought all of these by using Huabei, a credit service from Ant Group.
The commercial aired on Oct.5, a month before the world’s biggest initial public offering (IPO). Ant Group launched Huabei as a virtual credit card service in 2015, now has 500 million users in China.
As a fintech company, the lending business is Ant’s core business. The revenue from Ant’s lending business now makes up 39 percent of the company’s total sales, according to its listing documents.
“Whether it is a traditional financial industry or firms like Ant Financial, it should follow the rules. In the meantime, it is necessary to improve market efficiency while preventing risk,”former chairman of the China Banking Regulatory Commission Shang Fulin said in a financial summit on Nov. 14.
On Nov.3, Ant’s IPO officially was called off, leaving investors in despair, which had set to raise $39.6 million. The stock price of Alibaba answered to this shocking chaos later, it plummeted over 7.5% on Nov. 4.
Fintech is a new and growing industry in China. The size of this business was more than $1.8 trillion already by the end of 2015, according to a McKinsey report.
The market is growing, but the rules are not clear. The problems of this free fintech market have hanging in there for a long time since the online lending industry has grown fast from 2007 without regulations.
By the time of 2017, the government wanted to clean-up the messy, which a series of fund-raising crimes happened through fintech platforms. But the regulator failed to do so, as the development of fintech activities went too fast.
Another around of fintech crisis happened in 2018, more than 400 peer-to-peer lending platforms collapsed just in three months, according to Bloomberg. Those fintech companies that offer online lending services have grown fast since 2010, as regulations tightened bank credit followed the 2008’s financial crisis.
On Beijing’s concern, the growth of the giant Ant would pose a systemic risk to the entire financial system.
“People from traditional banks criticize Ant, for the company moved their cheese,” a private equity chairman, Deng Lijun said.
Ant Group insisted on calling itself a tech company, but the business is similar to traditional banks, lending money, but more easily. Anyone could request a loan without any collateral through Alipay, the company will lend money to debtors based on their credit and online shopping history.
“Ant Group has the same business as national banks, but national banks failed to compete with Ant,” Deng added, “I receive calls every day from the national banks, convincing me to apply for a loan.”
Ant raises funds from many local banks or small banks, then loans to individuals and small business entrepreneurs with good credit.
Ant uses its own credit system, called Zhima Credit, to analyze and evaluate users’ credit scores. “This is unreasonable in terms of social attributes,” said Lin Weiliang, a director of an investment company, “Alibaba does not have the right to own those data, especially for commercial use, because these are public resources.”
However, data privacy is not the only concern. “The current traditional banks’ advantage is that the lending system is complete and stable and safe,” said Lin.
The rising risks of bad debt could finally destroy the world’s second-largest banking system and the financial market, just like the 2008 financial crisis did to the US.
Now, with Ant’s case, regulators finally focused on the fintech industry. On Nov. 6, Fang Xinghai, the vice-chairman of the China Securities Regulatory Commission, made a speech, said that Ant Group’s second-time IPO will depend on how the company responds to the changing new fintech rules.
Before that, the People’s Bank of China and the China Banking and Insurance Regulatory Commission issued draft rules on Nov. 3. According to the draft rules, the online lending companies should provide over 30 percent fund jointly with banks, but Ant Group only offered two percent with its lending services now.
Another requirement is that fintech firms must behave like banks, according to Liang Tao’s speech in a financial forum, who is the vice chairman of the China Banking and Insurance Regulatory Commission. With new regulations drafted, the valuation of Ant’s IPO could reduce by $140 million, according to Bloomberg.
However, the fintech issue is not just about financial safety but also aim to a battle between the US and China. A month ago, China launched its digital currency, leading a step forward amid the US-China tech war.
Last year, China officially launched a technology innovation board, namely STAR board, an equivalent to Nasdaq in the US, where Ant Financial planned to go IPO. Within just one year, the STAR board has become the world’s three IPO venues.
“For the financial system, game and balance is the best state,” Lin commented on this, “traditional banks do what they are good at, and fintech companies like Ant improve their own specialties.”
