China’s banking system,dominated by the big state-owned banks,is tilted towards big,largely state-owned,borrowers. Ant was able to grow into the boom in unregulated P2P lending to consumers and small businesses and survived a crackdown on that sector in the middle of the last decade to emerge as the dominant player in microfinance.

Its growth was fuelled by partnerships with smaller regional banks. It has more than $US260 billion of loans it has made in partnership with a bank,to which it has contributed only about 2 per cent of the funding.

China’s authorities are regarded as control freaks. For most of Alibaba’s and Ant’s histories they had allowed them to grow relatively unchecked,taking some pride in their innovation. The IPO,however,galvanised them even as Ma’s speech antagonised the regulators and the big commercial banks.

The PBOC plays a central role in China’s management of its financial system and economy. It doesn’t use interest rates as its primary tool but bank reserves. If it wants to increase economic activity it lowers the minimum reserves the banks have to hold to encourage them to lend more. If it wants to dampen down activity it dials up the reserve requirements.

Having unregulated mega-fintechs like Ant (and Tencent Holdings) dominating e-commerce payments and eating into the territory of regulated banks – and Ma musing about the potential of (Ant-issued?) digital currency – threatened to undermine,or at least weaken,the PBOC’s ability to control credit.

Moreover,the PBOC and the central authorities have been trying to deleverage an over-leveraged financial system in recent years. That effort was interrupted by the pandemic and the need for monetary policy stimulus but has since been resumed.

The scale and concentration of risk within Ant and the rate of its continuing growth is at odds with that objective.

The effort to reduce financial risk started in 2017 when it emerged as a priority at the Communist Party’s national congress.

After that congress China’s state council established a financial stability committee which sits above the pre-existing financial sector regulators and has a specific brief to oversee activity that falls – as Ant’s did – within the gaps in the regulatory coverage. Subsequently the bank and insurance regulators were merged and the PBOC’s powers were widened.

With hindsight,the previous combination of enthusiasm and regulatory inertia that was China’s response to the growth of its fintechs had dissipated as the focus on systemic risks increased and the regulatory architecture was redesigned to deal with them.

It is obvious that Ant’s new holding company will have to hold a lot more capital or shrink its balance sheet. If it were regulated as a bank it could be required to hold more than 10 times as much capital against its loan book as it has today.

The authorities also imposed a new requirement earlier this year that forces online lenders to contribute at least 30 per cent of the funding for loans they offer in partnership with banks.

Either Ant will have to greatly reduce its co-lending,raise more capital to support its vastly increased share of the funding for those loans or both. Other new measures might force it to eschew the smaller regional banks it traditionally dealt with and partner with the big commercial banks Ma despised.

The authorities are also more broadly concerned about the sheer scale and dominance of the handful of big e-commerce giants that dominate online activity in China.

Alibabahas just been fined $US2.8 billion and forced to restructure its e-commerce businesses to protect merchants and customers from unfair competitive practices after an anti-trust investigation that’s part of a wider competition policy crackdown on e-commerce.

The online platforms are also being required to give the authorities access to their customers’ data,ostensibly to improve the ability of regulated banks’ ability to assess creditworthiness in the face of rising consumer loan defaults as well as giving the PBOC more insight into credit quality trends within the less visible sectors of the system.

Chinese laws do,ostensibly,provide some data protection – consumers have to give their consent to share data with third parties – but there’s now considerable pressure being exerted on Alibaba,Ant and the other big e-commerce companies to devise mechanisms for enabling the data to be handed over.

China’s Community Party authorities,of course,generally aren’t averse to collecting data on the activities of their citizens,or those of other nations. They’d no doubt be only too happy for the central government to be one of the third parties.