Chinese scrutiny increases investment risk of ‘beast’ Ant

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Chinese regulators have brought in new rules, including putting a cap on interest rates that tech platforms can charge for their own lending. (AFP)
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Updated 16 October 2020

Chinese scrutiny increases investment risk of ‘beast’ Ant

  • Regulators are becoming increasingly worried about banks’ inadequate risk controls on the consumer loans business

As Ant Group was working in August toward its giant IPO, at least two smaller Chinese banks with existing ties to the fintech firm decided to stop sourcing new consumer loans from it, people with knowledge of the matter said.

Their moves came after regulators scrutinized banks that used Ant’s technology platform excessively for underwriting consumer loans at a time when concerns about defaults and lenders’ asset quality grew in a pandemic-hit economy, said the people.

The sharper regulatory focus over Ant’s cash cow and rapidly growing consumer lending business to curb financial sector risk has emerged as a key concern for potential investors ahead of its likely $35 billion float, the world’s largest.

For its lending business, Ant originates demand from retail consumers and small businesses and passes that on to about 100 banks for underwriting, earning fees from the lenders and putting its own balance sheet at minimum risk.




Ant is targeting a valuation of $250 billion or more in its IPO. (Reuters)

Ant’s consumer lending balance was 1.7 trillion yuan ($254 billion) as of end-June this year, or 21 percent of all short-term consumer loans issued by Chinese deposit-taking financial institutions.

“The ‘catch me if you can’ type of game between regulators and Ant will always be there,” said Dong Ximiao, chief analyst at the Zhongguancun Internet Finance Institute, a think tank backed by Beijing’s Haidian district government.

“But the trend of tight regulations won’t go backwards for sure,” Dong said. “Regulators are now well aware of how harmful it would be to set free a beast like Ant.”

With its unique business model and the absence of peers in China and elsewhere, analysts say Ant has mainly thrived as a technology platform away from banking sector’s regulations despite its bouquet of financial offerings.

Even in the run up to the IPO the company tried to burnish its tech credentials — it changed its name to Ant Group from Ant Financial — and is pushing brokerages to get tech analysts to cover the firm two separate sources said.

However, regulators are becoming increasingly worried about banks’ inadequate risk controls on the consumer loans business and their excessive reliance on external tech platforms such as Ant to tap customers.

HIGHLIGHT

  • Regulator sharpens focus on banks using Ant for loans.
  • Ant-related lending makes up a fifth of consumer loans.
  • At least two banks stopped sourcing new loans from Ant.
  • Ant looking to launch $35bn IPO, the world’s largest ever.

This year, regulators and the top court have unveiled new rules, including putting a cap on interest rates that tech platforms can charge for their own lending, to standardise practices and protect bank balance sheets.

The decision of two smaller banks to stop bringing in new consumer loan business via Ant came after the PBOC kicked off a survey in July to investigate the bad loan ratio of banks’ such co-lending business, said the people.

The people, who received the PBOC guidance and have direct knowledge of the banks’ actions, declined to be named and didn’t want the lenders’ names to be mentioned as they were not authorized to speak to the media.

Ant, an affiliate of e-commerce giant Alibaba, said the information about the action taken by the two smaller banks was “unsubstantiated” and that in the past two months the company had tied up with more banking partners.

In its IPO prospectus, Ant said it had “adjusted” its business in the past due to regulatory requirements, and it might need to make more changes.

PBOC did not respond to Reuters request for comment.

Starting as a payments processor in 2004, Ant built an empire by offering its users short-term loans that are credited within minutes and selling insurance and investment products.

Ant is targeting a valuation of about $250 billion or more in its IPO, similar to the market cap of Industrial and Commercial Bank of China, the No.1 bank by assets globally. Adding to the risk for potential investors in Ant, the US State Department has submitted a proposal for the Trump
administration to add Ant to a trade blacklist, Reuters reported earlier on Thursday.

And in an indication of the regulatory challenges ahead at home, Li Wei, PBOC’s technology department head, addressing a conference organized by Ant last month, warned banks on their reliance on tech platforms.

“No matter how the form of financial businesses evolves ... financial institutions should never outsource their key licensed financial credentials to others, and all financial businesses should
be licensed and under regulations,” Li said. 


IMF: Nearly all Mideast economies hit by pandemic recession

Updated 20 min 10 sec ago

IMF: Nearly all Mideast economies hit by pandemic recession

  • The IMF estimates that the global economy will shrink 4.4% this year
  • The IMF projects the Lebanese economy will see one of the region’s sharpest economic contractions this year at 25%

DUBAI: The coronavirus pandemic has pushed nearly all Mideast nations into the throes of an economic recession this year, yet some rebound is expected as all but two — Lebanon and Oman — are expected to see some level of economic growth next year, according to a report published Monday by the International Monetary Fund.
This comes as the IMF estimates that the global economy will shrink 4.4% this year, marking the worst annual plunge since the Great Depression of the 1930s.
Well before the coronavirus swept across the globe, several Mideast countries had been struggling with issues ranging from lower oil prices and sluggish economic growth to corruption and high unemployment.
The IMF projects the Lebanese economy will see one of the region’s sharpest economic contractions this year at 25%. The pandemic has only pushed the country further to the brink after a wave of anti-government anger before the virus struck.
Lebanese demonstrators were protesting government corruption, foreign exchange shortages, hyperinflation, constant electricity cuts and increasing poverty. The currency has dropped by 70% compared to the end of last year, with people struggling to afford basic goods. A devastating explosion at Beirut’s main port in August killed at least 180 people, injured more than 6,000 and destroyed entire neighborhoods. The blast left hundreds of thousands of people homeless.
While Mideast nations have seen fewer confirmed cases and deaths from the virus than countries in Europe and the US, the region still faces challenges in containing the disease.
“Risks of a worse-than-projected scenario loom large, particularly given recent surges in COVID-19 infections in many countries around the world that have reopened,” the IMF warned.
Iran, for example, recorded its highest daily death tolls from the virus last week. Its economy shrank by 6.5% last year and is projected to contract by another 5% this year. The IMF, however, expects Iran’s economy to rebound with 3.2% growth next year, based in part on the government’s future capacity to manage the virus, which it thus far as has struggled to do.
“Iran was among the first countries to become an epicenter of COVID-19 and we are now in the third wave of the pandemic, and this was on top of an economy that has been underperforming because of (US) sanctions,” Jihad Azour, director of the Middle East and Central Asia Department at the IMF, told The Associated Press.
*Meanwhile, wealthy Mideast oil exporters are expected to see their economies contract by 6.6% in 2020, the IMF said. Gulf Arab states, however, are expected to see average economic growth of 2.3% next year. The IMF says it projections are based on assumptions that the price of oil averages $41.69 a barrel in 2020 and will rise to $46.70 a barrel in 2021.*
*The IMF revised its gloomy estimate of Saudi Arabia’s economic contraction down from 6.8% to 5.4%. As one of the world’s largest oil producers and top 20 largest economies, the kingdom took the bold step this year of trying to shore up more revenue by tripling value-added tax to 15% and increasing customs duties.*
Egypt was the sole outlier in the region, experiencing modest growth of 3.5% this year after more than 5% growth annually for past two years as lower energy prices help it as an oil importer. Still, Egypt faces challenges with its massive population and as tourism revenues remain sluggish.
The IMF, known for its bullish stance on taxes and subsidy cuts, has largely suspended its calls for belt-tightening austerity measures as people struggle under the weight of lockdowns and job losses. The IMF said “in general, tax increases would be more effective after the crisis” as such measures “will likely be a drag on the recovery and invite larger fiscal costs in the future.”
The international lender is calling on countries to focus their immediate priorities on ensuring adequate resources for health care and correctly targeting support programs to the most-vulnerable people.
Meanwhile, other Mideast oil exporters like the United Arab Emirates, home to Dubai and Abu Dhabi, will see an economic contraction of more than 6% this year, while Oman’s economy is projected to shrink by 10%. Iraq faces a recession of 12%, the IMF said.
The World Bank estimates the pandemic has thrown between 88 million and 114 million people into extreme poverty, which is defined as living on less than $1.90 a day.
According to the International Labor Organization, working hours in Arab states declined by 1.8% during the first quarter of 2020, equivalent to about 1 million full-time jobs. That number jumped to 10.3% in the second quarter, equivalent to about 6 million full-time jobs.
While Mideast states have rushed to provide various forms of support to their own citizens amid the pandemic, the impact from the virus has been acutely felt by many of the millions of low-wage laborers who hail mostly from South Asia and reside in the region. Their families back home rely on their salaries for survival.
Azour said Gulf Arab states alone provide 18% of global remittances. He said these countries should use the moment “to modernize labor laws” by providing support to all laborers in their countries.