Shares of Alibaba Group Holding Limited (NYSE: BABA) experienced a significant boost in Hong Kong trading after news broke that China is set to announce a fine of over 8 billion yuan ($1.1 billion) on its fintech affiliate, Ant Group Co. This development marks the conclusion of the investigation into the company founded by Jack Ma.
According to sources familiar with the matter, China’s central bank is expected to disclose the fine on Friday. This decision will enable Ant Group to pursue a financial holding company license, revive its growth, and potentially proceed with its initial public offering plans.
In response to this news, Alibaba’s shares surged by as much as 6.4% in Hong Kong, the largest surge in about a month.
Market experts believe that the positive response from investors stems from the expectation that the scrutiny on Alibaba and Ant Group will come to an end with this fine. Despite being a substantial amount, 8 billion yuan is considered manageable for such a large company, especially when compared to Ant’s estimated profit of 9.6 billion yuan in the previous quarter.
The investigation into Ant Group was a significant event that marked the beginning of a stringent crackdown on the wider Chinese internet industry. This crackdown caused substantial losses in market value for industry leaders such as Alibaba and Tencent Holdings Ltd. If Ant Group is allowed to resume its business growth, it could signify that Beijing is prepared to support the private sector and boost the country’s economy.
Regulatory Clampdown on the Chinese Tech Industry
Ant Group’s initial public offering was halted in 2020 following Jack Ma’s public criticism of financial regulators. This move triggered a government crackdown on the private tech sector, resulting in accusations of monopolistic behavior against Alibaba and the imposition of a record fine.
The years of intense scrutiny have taken a toll on Ant Group’s profitability, while Alibaba has undergone restructuring, dividing itself into six main businesses. Initially, investors welcomed this value creation, but Alibaba’s shares have since declined from their 2023 peak, losing over $600 billion in value since the Ant incident unfolded.
In 2021, the central bank ordered Ant Group to consolidate all financial units into a holding company and open its payments app to competitors. It also mandated the separation of payments from other products, including lending services, to rectify improper linking.
The conclusion of this investigation is eagerly anticipated by market observers to gain insight into Beijing’s approach toward China’s vast internet sector. The government had previously pledged to ease regulatory pressures on various private sectors, including technology and online education, as the country strives to revive its economy.
While this latest development demonstrates Beijing’s commitment to supporting the sector, further actions will likely be necessary to restore investor confidence. Ant Group is still awaiting regulatory approval to begin the review process for establishing a financial holding company and eventually resuming its IPO.
Vey-Sern Ling, managing director at Union Bancaire Privee, commented on the changes in Ant Group’s value, stating, “Ant is a very different company from before with all the restrictions in place and its valuation should be much smaller.”
Regulatory Hurdles for Ant Group’s IPO
Before its IPO, Ant Group was valued at $280 billion, but the multitude of regulations implemented over the past two-plus years has significantly diminished its worth, as it now leans more toward “fin” than “tech.”
Earlier this year, Jack Ma relinquished his controlling rights in Ant Group, which complicates the company’s prospects for an immediate IPO.
Due to regulatory requirements, companies cannot list China’s A-share market if there has been a change in control within the past three years. Similarly, the waiting period is one year for Hong Kong’s stock exchange. Therefore, Ant Group faces obstacles in pursuing an IPO in the near future.