By: Eric Ettorre
On February 22, 2021, China’s banking regulator formalized rules that will ultimately force the Ant Group Co.’s internet-lending platform to fund at least thirty percent of every loan they make jointly with commercial lenders.[1] This blog concerns the Chinese government’s efforts to limit internet-lending throughout its economy by 2022 to perpetuate the ongoing siege by the Chinese government on the Ant Group, which was exacerbated by the Ant Group’s initial public offering (“IPO”). The Ant Group (“Ant”) is under scrutiny by the Chinese government again and is one of the companies most affected by this new regulation.[2] The inspection into Ant commenced after Ant did not agree to provide personal data of its users to the central Chinese government.[3] Ultimately, this regulation’s effects will trickle down to the citizens of China because once plentiful and liquid capital is capped, regional banks will be prevented from making online loans to those who live outside of the regional banks’ jurisdictions.[4]
Ant partners with nearly 100 different commercial lenders, such as banks, trust companies, and finance companies, to fund an equivalent of $267 billion in outstanding consumer loans.[5] Ant’s $267 billion in consumer loans accounts for almost one-fifth of China’s short-term household debt.[6] Ant collects fees from the interest income banks earn on loans and is able to fund programs that help supply credit to many free-spending young adults in China who typically cannot qualify for traditional bank-issued credit cards.[7]
Under the new Chinese regulations, banks will have to limit their co-lending with any internet platform to twenty-five percent of their Tier 1 net capital, while the overall online loans they make do not exceed fifty percent of the cost of the existing loans.[8] Essentially, regional banks will not be able or allowed to make loans to citizens that live outside of their particular jurisdictions. While the new regulations benefit from providing market stability and prevent banks from over-relying on online lenders for credit assessment and overreliance on Fintech partners, there is a severe drawback.[9]Regulatory loopholes that regional banks have been relying on to expand online lending will no longer exist. Business growth will be stunted because many regional banks partnering with Ant provided needed liquidity to start-up businesses. The restrictions may effectively cause businesses to shut down. There are reciprocal consequences for businesses interested in entering the Chinese marketplace because they may not be able to secure loans from Chinese banks.[10]
The consistent uptick in enforcement by the Chinese government against Ant has sparked curiosity among journalists. A Wall Street Journal exclusive report investigated whether the new banking regulation is just another step in pushing the Ant initial public offering further away from installation.[11] The investigation revealed that Ant operates a complex but typical ownership structure for businesses in China.[12] Within the ownership structure are some of China’s richest individuals and power players who fund various projects.[13] These powerful individuals are close to President Xi Jinping and have the potential to decimate his rulership.[14] Ultimately, it was the public condemnation of the state’s regulatory powers and the investigation into Ant’s ownership structure that led to President Xi’s decision to shut down Ant’s IPO and force the company to scale down the lending and loan services.[15]
[1] Xie Yu, China’s Online-Lending Curbs to Hit Big Tech Firms and Regional Banks, The Wall St. J. (Feb. 22, 2021), https://www.wsj.com/articles/chinas-online-lending-curbs-to-hit-big-tech-firms-and-regional-banks-11613992441?mod=business_major_pos6.
[2] See id.
[3] Sun Yu, Jack Ma’s Ant Defies Pressure from Beijing to Share More Customer Data, The Fin. Times (Mar. 2, 2021), https://www.ft.com/content/1651bc67-4112-4ce5-bf7a-d4ad7039e7c7.
[4] Yu, China’s Online-Lending Curbs to Hit Big Tech Firms and Regional Banks, The Wall St. J. (Feb. 22, 2021), https://www.wsj.com/articles/chinas-online-lending-curbs-to-hit-big-tech-firms-and-regional-banks-11613992441?mod=business_major_pos6.
[5] See id.
[6] See id. (understanding that Ant’s primary loaning companies are Huabei and Jiebei).
[7] See id.
[8] See id. (considering that banks can only contribute and back a maximum of fifty percent of loan for online loans and in a co-lending situation can only back a maximum of twenty-five percent).
[9] See id.
[10] See id.
[11] Lingling Wei, China Blocked Jack Ma’s Ant IPO After Investigation Revealed Likely Beneficiaries, The Wall St. J. (Feb. 16, 2021), https://www.wsj.com/articles/china-blocked-jack-mas-ant-ipo-after-an-investigation-revealed-who-stood-to-gain-11613491292?page=1.
[12] See id.
[13] See id. (explaining that the major contributors to Ant at Simon Hu, Fang Jiang, and Eric Jing).
[14] See id. (considering that Xi now has the most political power in the modern Chinese government since Mao Zedong).
[15] See id.
