- Regulators are instructing Alipay to move its loan products to a new app.
- The government is also forcing Alipay to move its credit rating data to a new company controlled by the government.
- China is committed to reducing credit risk in its economy, and Alibaba is bearing the brunt of those efforts.
On Monday, September 13, Chinese officials put another measure in a series of raids against the e-commerce, fintech and cloud leader Alibaba (WKN: A117ME). A year ago, Alibaba was the starting point for official crackdown on Chinese tech giants. At that time, the regulatory authorities canceled the IPO of Alibaba’s financial subsidiary Alipay. The reason was statements made by the founder, Jack Ma.
Almost a year later, Beijing has another plan ready for the fintech giant. This time it’s about Alipay. This provides for a split, the involvement of the government as an investor and the disclosure of protected data.
What is Alipay?
Alipay combines a comprehensive digital payments platform with other traditional financial products such as loans, asset management and insurance. Before the authorities intervened, Alipay used data from its payment platform and Alibaba’s leading e-commerce platform to assess customers’ creditworthiness. External banks would finance the loans, so Alipay does not bear any credit risk.
According to the latest figures, Alipay has a total of more than 1.2 billion users, while the Huabei credit card platform has 190 million users and the Jiebei installment loan product has 500 million users. These unsecured loan products have angered China’s regulators, especially as loans soared to $ 271 billion in the first half of 2020.
What the authorities are up to
Chinese regulators are increasingly concerned about the escalating spending and debt boom across the country’s economy. The great real estate developer Evergrande is in serious trouble that could pose a risk to the rest of China. Therefore, China is trying to take action against excessive consumer credit. This also applies to Alipay products that are subscribed outside of the jurisdiction of central banks and other state-controlled financial institutions.
The authorities are proposing to split Alipay into essentially three different companies. One of these will merge Jiebei and Huabei’s credit products into a single separate entity, and another will be Alipay’s credit scoring business. The rest is supposed to include the payment platform and other products.
As reported in June, the new loan company will be named Chongqing Ant Consumer Finance Co. and 50% owned by Alipay. The other 50% will come from other companies, including some state-owned banks. The new company will also be liable for up to 30% of the loans it extends. That means the new company will have to keep more capital on its balance sheet and will likely get a much lower valuation in the market.
Just this week, regulators said they would also require these products to be offered in a completely separate app, the Financial Times reported.
Alipay also gives out data
Regardless, Alipay will likely have to spin off its credit scoring business into a new joint venture that will also include government facilities. Reuters has reported that Alipay will only keep a 35% stake in the new joint venture. The joint venture will also apply for a credit rating license, which has previously only been granted to state-owned companies. It is clear that Beijing wants to tear down the walls around Alipay’s vast inventory of payment and e-commerce data. They have enabled the company to rate loans in a unique way.
What are the consequences? The Financial Times also reported that China’s central bank wants banks and fintech lending decisions to be made only by approved credit rating firms. That could mean that Alipay’s competitive advantage in lending decisions could disappear. Because all lenders would have to follow the same rules for evaluating potential borrowers.
What does this mean for Alibaba shareholders?
Alibaba only owns 33% of Alipay, so headwinds in Alipay’s growth are unlikely to justify Alibaba’s 50% slide. And it’s not like Alipay is disappearing. It’s just that the company’s growth and profitability could take a setback. That might not be so bad if it succeeds in containing the macroeconomic financial risk and at the same time giving Alipay the opportunity to go public.
However, Beijing is also targeting the barriers that Alibaba had put in place as the first-time provider in e-commerce. This week, Beijing directed major internet platforms to open their ecosystems to competitors instead of blocking links to them. And of course, earlier this year, Alibaba was fined $ 2.8 billion for forcing brands into exclusive contracts to gain access to its large e-commerce platform.
Basically, Beijing is trying to undo various advantages that it sees as artificial or at least the result of monopoly power. The government does not see any real innovation here that benefits the consumer. Unfortunately, it appears that Alibaba is perhaps the biggest culprit in both e-commerce and fintech, or is the first to exploit its monopoly power to strengthen its competitive position.
Alibaba stock has fallen so far that it may have factored all of that bad news into the current low price. However, one should know that the company will have to fight much harder for new business in the future than in the past.
The item China Is Stressing: Is It Time To Sell Alibaba? first appeared on The Motley Fool Deutschland.
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Billy Duberstein owns shares in Alibaba. The Motley Fool owns shares of and recommends Alibaba. This article appeared on 9/15/2021 on Fool.com and has been translated for our German readers.
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