Ant and Alibaba lost $ 850 billion due to the confrontation between Jack Ma and Beijing

Ant and Alibaba: The long-standing clash between Jack Ma and the Chinese government has reached a critical juncture, revealing the substantial financial toll it has taken on Ant Group Co. and Alibaba Group Holding Ltd.

After nearly three years of contention, the confrontation between Jack Ma and the Chinese government is finally approaching its resolution. The ramifications of this conflict have proven to be exorbitant for Ma’s companies, Ant Group Co. and Alibaba Group Holding Ltd.

Chinese authorities recently announced the conclusion of their probe into Ant Group, imposing a hefty fine of almost $1 billion on the financial technology company. This investigation was initiated after Ma openly criticized Beijing’s regulation of the financial sector in 2020, leading Ant Group to cancel its highly anticipated initial public offering (IPO) – an offering that would have been the largest in history. However, the financial consequences extend beyond the penalty itself. The government’s crackdown has significantly eroded confidence in China’s private sector, exacerbating concerns about consumer spending, the housing market, exports, and infrastructure investment. Ant Group has been forced to overhaul its business model, retracting from sensitive sectors and reducing competition with state-backed banks. As a result, its once-estimated valuation of around $315 billion after the IPO has dwindled to a mere $78.5 billion.

In a bid to provide relief to investors ensnared in the protracted regulatory crackdown on the fintech giant, Ant Group has proposed a buyback of up to 7.6% of its shares. Meanwhile, Alibaba Group is deliberating whether to offer some of its own Ant shares for the buyback, as stated in a recent exchange filing.

Alibaba Group has not fared any better amid the turmoil. The administration of Xi Jinping targeted the e-commerce pioneer as part of a wider crackdown on prominent internet platforms. Earlier this year, Alibaba announced its division into six major businesses. Despite a temporary 8% rally in shares following the conclusion of the Ant Group probe, Alibaba’s market value currently stands at $234 billion, reflecting a staggering $620 billion decline from its peak in 2020.

Kendra Schaefer, a partner at Beijing-based consultancy Trivium China, stated, “The companies have made amends, and the punishments have concluded—at least for this particular set of issues.” Ma’s empire, headquartered in Hangzhou, became the epicenter of the Communist Party’s crackdown, affecting various sectors of the private industry, including real estate, online education, gaming, and ride-hailing. Xi’s goal was to recalibrate the country’s economy to prioritize “common prosperity” and bolster support for the middle class. However, these reforms resulted in over $1 trillion in losses for Chinese stocks, with venture capitalists and institutional investors bearing the brunt of the party’s ideological stance.

While recent measures by China may suggest a potential easing of the crackdown, the policy focus on ensuring social stability and national security remains unchanged.

Schaefer emphasized, “Taking care of employees and society comes first, and then you can focus on investors. That’s the message being conveyed now.”

The staggering loss of over $850 billion in value across Ma’s properties underscores the immense challenge of rebuilding trust with international investors. The impact is not solely confined to declining corporate profits resulting from slower economic growth; rather, it reflects a fundamental shift in national priorities.

China’s economic struggles are compounding, placing significant pressure on Xi to regain support from the private sector. Bloomberg Economics envisions a downside scenario where China’s economic growth decelerates to 3% by 2030, assuming a sharper property slump, sluggish pace of reforms, and increased US-China decoupling. Alongside Ant Group, the People’s Bank of China has also imposed fines on several other banks and Tencent Holdings Ltd. Both Ant Group and Tencent have released statements following the fines, indicating their substantial progress in implementing the required reforms dictated by Chinese regulations.

Martin Chorzempa, a fellow at the Peterson Institute for International Economics, commented, “Authorities have encountered difficulties in determining the desired shape of the financial technology landscape and the role of major technology firms within it. That’s why it has taken so long to reach the finish line of the rectification plan with China’s most significant financial technology company.” The turning point for Jack Ma’s decline occurred in October 2020 when the outspoken entrepreneur criticized the anachronistic regulations that, in his view, would stifle innovation in China during a speech at the Bund Summit in Shanghai. Just days later, Ma was summoned by officials to the China Securities Regulatory Commission, where they highlighted various shortcomings in Ant Group’s business, ranging from consumer lending and wealth management to online payments, ultimately leading to the cancellation of the IPO that could have raised $35 billion.

Subsequently, Ant Group encountered additional regulatory hurdles and was compelled to adopt a more traditional banking approach. As a result, Ant Group’s profitability plummeted as the company underwent extensive restructuring to comply with China’s regulatory demands, shifting its focus from expansion to regulatory compliance. Net income, which experienced double-digit growth in early 2021, witnessed four consecutive quarters of year-on-year decline in 2022. In early 2023, Jack Ma announced his relinquishment of control over Ant Group, although he still retains approximately 6.2% of the voting rights, as per Bloomberg calculations. Ant Group faced numerous setbacks during the peak of the two-year tech crackdown. In April 2021, Chinese authorities mandated that Ant Group transform into a financial holding company, but to this day, the company has been unable to obtain the required license.

Ant Group has also been compelled to open its payments app to competitors, while its lending practices have been significantly curtailed. The firm is now prohibited from steering users toward loans and other lucrative services, and its lending capacity has been restricted by new rules. Previously, consumer loans, which were made jointly with banks and served as a major growth driver, were split from its Jiebei and Huabei brands.

Ant Group currently holds a 50% stake in its consumer lending business, established in 2021 as part of its restructuring, which has the potential to issue loans worth approximately 400 billion to 500 billion yuan, according to Bloomberg calculations. Furthermore, the assets under management of Ant Group’s money-market fund, Yu’ebao, once the largest globally, have declined by around 36% to 759 billion yuan ($111 billion) as of September, compared to two years ago.

To some extent, Ant Group’s challenges mirror the stagnant growth observed in China’s broader internet sector, which has been hampered by prolonged and stringent COVID-19 restrictions, coupled with increased scrutiny. Amid mounting economic and regulatory uncertainties, Alibaba Group has also suffered and has become a mere shadow of its former self.

As Asia’s most valuable company in the past, Alibaba Group’s core domestic commerce business faced severe repercussions from an antitrust investigation, resulting in a record fine of $2.8 billion in 2021. Additionally, Alibaba has faced intense competition from rivals such as Inc. and PDD Holdings Inc., leading to a loss of market share in the cloud sector to state-backed competitors.

In June, Alibaba underwent a significant management reshuffle in hopes of reviving the struggling company. Ma’s longtime associates, Joe Tsai and Eddie Wu, were brought back to lead the company, mere months after Alibaba’s announcement to split into six major units. The duo carries the responsibility of turning around a company that has struggled toregain stability following Beijing’s crackdown.

However, the investor response to the management reshuffle has been mixed. Alibaba’s stock fell by 1.5% on the day the new appointments were announced and continued to decline over the next three trading days. The division of Alibaba may potentially compound the challenges faced by Ant Group.

Francis Chan, a senior analyst at Bloomberg Intelligence, cautioned, “Alibaba’s breakup plan may do more harm than good to Ant Group. Its ‘crown jewel’ credit business faces constraints on growth due to pricing and capital limitations. Credit investigation firms now act as intermediaries between Ant Group and its funding partners. Firewalls within its ecosystem restrict cross-selling potential, payment fees are decreasing, and retail investors have lost interest in Yu’ebao.”

Although Ma still holds a spiritual role at Alibaba, his return to Hangzhou last month before the management reshuffle marked a significant development. Ma had spent an extended period traveling overseas following the government’s attempts to persuade him to return, in a bid to demonstrate authorities’ support for private entrepreneurs.

Chinese officials have been making efforts to reassure both foreign and domestic companies that the country remains open for business, especially in light of the challenges posed by a bumpy post-COVID economic recovery and ongoing tensions with the United States over technological supremacy.

However, these reassurances have yet to yield significant results. According to data provider Preqin, venture capital investment in China has plummeted by 50% year-over-year to $3.6 billion in the first four months of 2023.

Shen Meng, director of Beijing-based boutique investment bank Chanson & Co., explained, “The hefty fines imposed on Ant Group and Tencent, on one hand, demonstrate Beijing’s commitment to strengthening financial supervision. On the other hand, it also signals the end of the systematic rectification of internet platform companies. The objective is to restore confidence in private enterprises, but whether it will achieve that result remains uncertain. There might be a disconnect between Beijing’s expectations and the reality on the ground.”

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Conclusion: The prolonged clash between Jack Ma and the Chinese government has inflicted severe financial consequences on Ant Group and Alibaba Group. The regulatory crackdown, fines, and forced restructuring have taken a toll on their valuations and market positions. Rebuilding trust with international investors and restoring confidence in China’s private sector will be a formidable challenge. As China’s economic challenges multiply, the government faces the task of regaining support from the private sector while balancing social stability and national security concerns. The future trajectory of Ant Group and Alibaba Group remains uncertain as they navigate a shifting regulatory landscape and a changing business environment in China.

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