As fintech titan Ant Group prepared for a long-anticipated IPO, a struggle over the reach of regulation between founder and controlling stakeholder Jack Ma and financial regulators spilled into public view. 

In the days leading up to Nov. 5, when the fintech giant was set to go public and raise an estimated $34.5 billion, a series of pointed attacks on Ant Group were published in financial media including the central bank’s official newspaper. 

These articles called Ant Group “too big to fail” and a “systemic risk,” likening Ant Group to the sprawling financial institutions that brought about the 2008 crisis. One accuses it of tricking its customers in taking on extra debt. All argue that Ant Group should be required to follow the Basel Accords, the bank rules created in the wake of the 2008 crisis.

Some were rumored to be written by China’s top echelon of financial regulators. The people rumored to be behind the articles include Zhou Xiaochuan, the longest-serving governor of the People’s Bank of China—a figure who presided over China’s rise to a financial powerhouse and led the development of its modern financial system. 

These articles likely provide insight into regulators’ intentions for fintech. Ant Group’s lending practices have emerged as a key issue for regulators: On Nov. 2, the China Insurance and Banking Committee released a draft regulation that would limit the amount companies like Ant can lend out to micro-borrowers.

READ MORE:  UPDATED: Ant Group IPO delay and Jack Ma’s ill-timed speech

Ant Group: no need to regulate

In the last year, authorities have been making moves to raise the regulatory bar for Ant Group, among other fintech giants, and bring it closer to what banks have to comply with. 

In September, the State Council released new measures to introduce licensing requirements for  non-financial holding companies that are involved in financial services, and could potentially raise capital requirements for companies like Ant Group. 

“If you were previously unregulated, it feels like a clampdown,” Andrew Polk, co-founder of research firm Trivium, told TechNode. 

The People’s Bank of China (PBOC), which is chiefly responsible for “macro-prudential” policy to manage overall risk in the financial system, appeared particularly worried about Ant Group. In July, the PBOC asked banks to report lending data for H2 2018, the whole of 2019, and H1 of 2020. The central bank asked for separate reports on loans going through Ant Group’s platforms. 

As Ant prepared for a history-making IPO, regulators were asking the company to accept being regulated more like a bank. This posed a threat to the sky-high valuation that would justify raising more than any company had ever asked from the markets. 

But Ma believed that regulators misunderstood his business. Ant is more than a bank—as one of China’s two major online payments providers, it knows nearly everything about its customers—from rent payments to 3 a.m. e-commerce impulse purchases. Armed with this information, Ma believed, the company could assess risks with an accuracy banks could only dream of—making it safe for the company to operate at high leverage.

Ma thought the regulators were living in the analog past—and with weeks to go before the IPO, he decided to tell them in a very public setting.

On Oct. 24, Ma spoke at the Bund Summit, a Shanghai conference where some of the world’s top financiers discuss the state and future of the world economy, and China’s role in it. Speakers at this year’s conference included: China’s vice president Wang Qishan; the current and former governors of the PBOC, Yi Gang and Zhou Xiaochuan; the vice chairman of the China Securities Regulatory Commission, Fang Xinghai; high-level executives of China’s big four banks; former governor of the European Central Bank Jean-Claude Trichet; former UK Prime Minister Tony Blair; former US Treasury Secretary Robert Rubin; founder of US hedge fund Bridgewater Associates Ray Dalio; and former governor of the Bank of Japan Masaaki Shirakawa. 

In this setting, Ma said: “The Basel Accords are more like a club for the elderly”—irrelevant to the “young” field of online finance. The accords are a set of international standards created in the wake of the 2008 financial crisis to reign in the banks and improve the stability of the world’s financial sectors. 

The Basel Accords are about treating the diseases of the elderly with antiquated and overly complex systems. What we have to think about is: “What we should learn from the elderly?” The elderly and young people are not the same. The elderly care about whether there is a hospital, and the young people care about whether there is a school district.

The Alibaba founder said that tech companies are not afraid of regulation, but regulation using antiquated thinking: 

We are not afraid of supervision, we are afraid of monitoring using the way of yesterday. We cannot manage the airport the same way as the railway station, and we cannot manage the future with yesterday’s methods.

China’s financial sector suffers from a “pawnshop” mentality, Ma says, that must be replaced with big data.

The pawnshop idea of ​​mortgage cannot support the financial needs of world development in the next 30 years. We must use today’s technological capabilities to replace pawnshop thinking with a credit system based on big data.

The day after Ma’s speech, at the same event, Shang Fulin, director of the Economic Committee at the Chinese People’s Political Consultative Conference and the former governor of the China Banking Regulatory Commission, said that regulation must catch up with financial technology in order to reign in its excesses, making special notes of risks to the economy and privacy that big tech brings to the finance sector.   

As modern information technology is more deeply involved in financial transactions, risk decision-making, internal control compliance, intelligent analysis, and other activities, information technology risks are more likely to lead to chain reactions such as operational risk, credit risk, liquidity risk, and so on. It is necessary to guard against the risks that may be brought about by the digitization of traditional business, as well as the risk of using technology to innovate in finance.

The ‘old men’ reply 

A week after Ma’s now-infamous speech, he got a response: three prominent articles in state media laying out a case for stricter financial regulation on Big Tech, widely taken to represent the views of regulators. 

The first shot was a forum comment highlighted by the online edition of Guangming Daily, an influential state newspaper on Oct. 26. Ma was “arrogant,” and “the speech was not an idle talk over tea, but a targeted one in the context of Ant Group’s IPO.” “Without this kind of regulation [the Basel Accords], the size of the IPO will definitely be proportional to the sound of explosive thunder,” the commenter wrote, drawing on an image frequently used to describe industries as out of control.

A week after Ma’s speech, three strongly-worded editorials criticizing internet companies’ involvement in finance, all attributed to pseudonymous “senior scholars,” were widely reprinted on Chinese media. The latter two were printed in the official newspaper of the People’s Bank of China, Jinrong Shibao (literally, “the Financial Times”—no relation to the salmon-colored London paper).

On Oct. 31, a pseudonymous op-ed called for strict financial regulation on big tech. Market insiders believe that the author, credited as “senior scholar” Zhang Feiyu, was an insider from the regulatory authority, Reuters China reported. We are a little confused about the place of publication—we’ve found reprints citing both independent financial media Caixin and the PBOC-linked Jinrong Shibao as the original.

“There was no supervision of the development of fintech in its early stages,” Zhang wrote, reminding readers of the scams and losses associated with peer-to-peer lending platforms, which rose and fell 2007-2018.

Financial regulatory authorities must dare to say “no” when supervising big tech companies—otherwise they will be easily misled by their technology, held hostage by public opinion, and fail to conduct effective supervision, which will eventually distort the market and generate financial risks.

On Nov. 1, a second warning about unregulated fintech appeared in Jinrong Shibao under the name Zhou Jueshuo, emphasizing the systemic risks associated with fintech.

Rumours on social media identify the author as Zhou Xiaochuan, who served as the governor of the PBOC for 16 years. Using pseudonyms when writing publicly is common practice among government-affiliated public intellectuals, especially household names like Zhou Xiaochuan. 

The article did not single out a target, but attacked internet companies that participate in the financial sector. In the first two paragraphs of the main body, the author makes note of the benefits of internet companies’ involvement in finance, mentioning “Alibaba, Baidu, Tencent, and” It credits Ant with bringing hundreds of millions of people into the financial system.

Other than these name drops at the top, the text only brings up Ant Group as an example of a big tech company that has become too big.

The article argues that big tech firms in the finance sector must be reigned in, and outlines a strategy for regulators. The article blames big tech for:

  • Using data to gain unfair advantages, effectively creating monopolies that cannot be easily managed by traditional tools against unfair competition.
  • Evading financial regulation by obfuscating the true nature of businesses and products, and pushing the limits of business licenses to provide financial services.
    • “If a large Internet company provides a large number of financial services but claims to be a technology company, it is evading regulatory oversight, will be more prone to disorderly expansion, which causes hidden risks, and is not conducive to fair competition or consumer protection.”
  • Complexity of technology makes it harder to identify risks and determine responsible parties if something goes wrong. 
    • “It is difficult for regulators to understand high-tech ‘black boxes’ and their hidden risks.”
  • Data collection practices that pose risks to consumers through data leaks and algorithmic discrimination.
  • Posing serious systemic risks to the financial system—with the possibility of a domino effect if they fail. 

Large Internet companies are [said to be] “too big to fail.” Ant Group counts over 1 billion individual users, over 80 million institutional users, and 118 trillion digital payment transactions. Its listed market value may set a historical record. If it [Ant Group] faces financial difficulties, it will cause serious contagion risk.

The section concludes:

Due to the wide network coverage of large internet companies, the convergence of business models and algorithms, the contagion of financial risk will speed up and may evolve into systemic risk in a very short time.

To solve these problems, the author argues fintech giants must be regulated in the same class as banks, but grants that authorities must update their systems for a tech-driven era. He calls for rules to protect consumer rights and prevent systemic risk, requiring fintech companies to seek licenses and accept oversight like traditional financial firms. 

Finally, on Nov. 2, a third essay appeared in the PBOC newspaper, this time credited to “senior scholar” Shi Yu. The Nov. 2 essay singles out Ant, accusing it of exploiting retail borrowers.

The author starts by saying that the “‘so-called’ innovative Ant Group” is “the institution with the highest degree of cross-industry sprawl in the world.” Rebutting Ma, it continues to argue that “‘Yesterday’s regulation’ is not useless, and the Basel Accords are not outdated.”

The essay attacks the lending models of Ant Groups’ virtual credit card Huabei and its money market fund Yu’ebao, saying that what it calls “inclusive finance” is actually very costly to consumers: 

The annualized interest rate when borrowing from [Ant Group virtual credit card] Huabei was once close to 24%, and has dropped recently, but is now about 15%. At the same time, the Huabei borrowing mode on Alipay’s Yu’ebao feature… raises the interest that borrowers need to pay from the 5%-6% of a bank loan to 15%.

It also accuses Huabei of manipulating users’ consent and tricking them into taking on debt: 

At present, Huabei’s lending interest rates are disclosed in the form of daily interest rates, and are not converted into annualized rates, as required by regulations. Borrowing is often set as the default choice during periods such as Singles Day, and customers are easily deprived of other payment options.

Finally, the article urged regulators to examine Ant Group’s structure to require it to place financial services like Yu’ebao and Huabei under properly licensed online banks.

The moral

Probably the strangest state media response to Ma’s speech was the victory lap from official news agency Xinhua.

On Nov. 2, Ma and two other top Ant Group executives were called in for a talk with regulators, while regulators issued new rules about microlending.

That evening, Xinhua rendered a verdict on the Ma affair via the medium of roundabout bedtime podcast. Xinhua’s “Evening read”—a podcast offering “beautiful writing, every evening around 10 p.m.”—selected an essay titled “You can’t just say anything, you can’t just do anything; people can’t just do as they please.” 

Ma is not mentioned by name, but he appears by rebus in a painting accompanying the article, which shows a horse-shaped cloud floating over a leafless, dark forest. The billionaire’s name can be translated as “horse cloud.”

An essay on the importance of self-control, read aloud on a Xinhua bedtime story podcast the evening Jack Ma was called to speak to regulators, evoked the billionaire’s name through rebus with a painting by the Japanese artist Kaii Higashiyama. Ma’s name is composed of the Chinese characters for “horse” and “cloud.” (Image credit: Xinhua)

In a gentle voice accompanied by light piano and strumming guitar, host Wu Weiling tells listeners: “You can have different opinions, but you don’t have the right to throw stones.”

“Everything comes at a price,” Wu said in words highlighted in red in the accompanying transcript. “If you don’t have the capital, don’t do as you please.”

Eliza was TechNode's blockchain and fintech reporter until July 2021, when she moved to CoinDesk to cover crypto in Asia. Get in touch with her via email or Twitter.