Breaking up Ant worst-case scenario only

The future of Ant Group remains uncertain - with the worst-case scenario being the tech giant forgoing its money management, credit and insurance businesses - that means halting its operations in the units that service half a billion people.

Optimists say regulators are merely reasserting their right to oversee China's financial sector and sending a warning to internet companies without intentions of drastic change after Ant was told to fix a litany of business failings.

China ordered Hangzhou-based Ant to reexamine its fintech businesses - spanning from wealth management to consumer credit lending and insurance - and return to its roots as a payments service. It also needs to set up a separate financial holding company to comply with rules and ensure it has sufficient capital.

But the move presents a serious threat to the growth and most lucrative operations of billionaire Jack Ma Yun's online finance empire. Regulators stopped short of asking directly for a breakup of the company, yet stressed it was important Ant "understand the necessity of overhauling its business" and told it to come up with a plan and timetable as soon as possible.

Authorities also berated Ant for subpar corporate governance, disdain toward regulatory requirements, and engaging in regulatory arbitrage. They said Ant used its dominance to exclude rivals, hurting the interests of its hundreds of millions of consumers.

Some analysts believe regulators are not thinking of breaking up Ant because "no fintech company in China has a monopoly status," said Zhang Kai, of market research firm Analysys Ltd. "The act is not just targeting Ant but also sending out a warning to other Chinese fintech companies."

But a more troubling outcome would be if regulators ask Ant to spin off its more lucrative operations in wealth management, credit lending and insurance, offloading them into a financial holding company that will face tougher scrutiny.

That would complicate the shareholder structure and hurt the company's fastest-growing businesses.

"Ant's growth potential will be capped with the focus back onto its payments services," said Chen Shujin, a Hong Kong-based head of China financial research at Jefferies Financial Group.

"In the mainland, the online payments industry is saturated and Ant's market share pretty much reached its limit."

Credit tech, which includes Ant's Huabei and Jiebei units, was the biggest revenue driver for the group, contributing 39 percent of the total in the first six months this year. It made loans to about 500 million people.

That outcome would be underpinned by the idea that China's leaders have grown frustrated with the swagger of tech billionaires and want to teach them a lesson by killing off their businesses - even if it means short-term pain for the economy and markets.

"The Communist Party is the end-all and the be-all in China. It controls everything," said Alex Capri, a Singapore-based research fellow at the Hinrich Foundation.

"There is nothing that the [party] doesn't control and anything that does appear to be gyrating out of its orbit in any way is going to get pulled back very quickly."

BLOOMBERG