SHANGHAI -- China's financial industry watchdog has announced new regulations that will deal an additional blow to Ant Group and fundamentally upset the online microlender's business model.
Banks will be required to manage risks for joint lending with internet platforms, such as Ant, and "strictly banned" from outsourcing the function, the new regulation issued on Feb. 20 by the China Banking and Insurance Regulatory Commission stipulated in its first article.
Ant receives loan applications via smartphones and forwards them, together with its credit assessments of applicants, to partner banks. The affiliate of Chinese e-commerce giant Alibaba Group Holding earns fees from lenders for providing the information.
The fees are estimated to be 15% or 20% to 30% of the partners' interest income and contribute to 40% of Ant's operating revenue. If Ant becomes unable to provide banks with credit assessments, its value to these lenders will plunge and it will eventually have to lower the fees it charges them.
The new regulations are aimed at strengthening banks' risk management, the CBIRC said. But in reality, they are targeted at Ant's principal revenue source -- small-lot lending to consumers and mom-and-pop business operators.
The CBIRC also stipulated, in a second article, that an online microlender like Ant will be required to provide at least 30% of the funding on its own in any single joint loan with a bank.
To date, Ant has either relied on banks for most of the funding or securitized its own loans to take them off its balance sheet. As a result, only 2% of lending is on its balance sheet. As Ant has 2 trillion yuan ($309 billion) in outstanding loans that were extended via smartphones, it will have to raise roughly $90 billion to clear the new requirement.
In addition to the huge cost of fundraising, the fate of Anbang Insurance Group and HNA Group shows what happens if a company in China borrows huge funds and makes an enemy of a particularly authoritarian leader. Wu Xiaohui, founder of Anbang, is in jail and the company was liquidated. HNA is in rehabilitation as part of bankruptcy proceedings.
Among other new regulations announced by the CBIRC, co-lending with a platform should not exceed 25% of a bank's core Tier-1 capital, while regional banks will be banned from online lending beyond areas where they are registered.
The imposition of regional restrictions on online services sounds unreasonable. But it is widely seen as an attempt to deal a fatal flow to Ant.
As business transitions to meet the new regulations are due to be completed in 2022 in principle, Ant has only a short time to map out a growth path persuasive enough to let it seek an initial public offering again.
For now, there are few signs of panic in the organization. Alipay, China's biggest digital payment platform owned by Ant, is working as usual, while many consumers are unaware of developments in the management of Alibaba and Ant due in part to restrictions imposed on news media by authorities.
But fundamentally, despite its 1 billion users, the Alibaba group may not have inspired love and loyalty among consumers, in part because their harsh expectations of employees are well-publicized.
A recent case in point is that of Ele.me, an online food delivery service unit under Alibaba, that initially said it would not pay any bonuses to its transportation staff unless they can each make 380 deliveries in the Feb. 15-21 Lunar New Year period.
"Absolutely impossible. I will not even try," a delivery employee posted on social media, amid many other similar messages.
A delivery staff for the Chinese version of Uber Eats said it was hard to make more than 30 deliveries in a day, assuming that the process from taking an order to delivery takes 20 minutes. This meant that it would take him 10 hours to make 30 deliveries without a break. He said it was possible to make 200 deliveries a week but 380 was an unreasonable target.
Ele.me's move was seen as being particularly heartless. The Lunar New Year is the most important event for Chinese and allows hundreds of millions of migrant workers to return home bearing gifts. But given the pandemic, many were not able to travel home and Ele.me's plan only compounded misery.
The company eventually apologized and gave in to higher bonuses following strong criticism by Chinese consumers.
This episode may have given Chinese President Xi Jinping even more reason to take a harsh line against the group. The leadership is particularly sensitive to public opinion.
If Alibaba and Ant had won the hearts and minds of people, the government may have approached them in less direct way. Without public sympathy, the government can get tougher on them without hesitation.