[Congeec]

If a financial institution operates like a bank but creates more risk than a bank, shouldn't it be regulated like a bank?

Jack Ma said banks should ditch the "pawnshop" mindset and switch to a credit-based loan service, because his Ant's micro/small loan service is completely backed by credit rather than something risk-proof properties like a house. Ant not only acts like a bank, but also is the largest credit buerau in China. It provides loan based on the credit score it rates on its customers.

This article also fails to mention the Basel Accords that Jack Ma criticized. After the 2008 financial crisis, Basel III includes regulations on "shadow banks" like Ant in addition to traditional banks. Is it possible for a bank that has only assets of 3B lends out 300B[1]? No, banks are prohibited due to regulations. But, Ant already did. They created an Asset-Backed Security (ABS) via a process called securitization. It is unprecedented that a financial institution with such big financial leverage and a large amount loan going unregulated.

A pawnshop is at least backed by real properties like houses. What back the risk Ant create? Consumers' credit?

If I still cannot make you understand, please google "2008 MBS ABS". You'd be surprised at the similarity of what Ant's been doing and what caused the financial crisis.

I sincerely hope hacker news readers take a look into the underlying financial bubble rather than "Chinese government reaps tech innovator" to which this article tries to mislead you.

[1] https://translate.google.com/translate?hl=en&sl=zh-CN&u=http...

[blueblisters]

The real question people are asking is why now? Didn't the regulators have enough time to assess the irregularities earlier? A $30 billion IPO plan couldn't have been made public without the regulators giving at least some in-principle approval, and I'm sure Jack Ma knows how to navigate the bureaucracy/politics in China before he would make such plans public. I don't understand Chinese politics much but this just reeks of vendetta.

>After the 2008 financial crisis, Basel III includes regulations on "shadow banks" like Ant in addition to traditional banks. Is it possible for a bank that has only assets of 3B lends out 300B? But, Ant already did. They created an Asset-Backed Security (ABS) via a process called securitization. It is unprecedented that a financial institution with such big financial leverage and a large amount loan going unregulated.

If that's the case, why were they being allowed to continue as a privately-owned lender for so long?

[analyst74]

> The real question people are asking is why now?

That is a very good question, from public information I can gather around Ant and Ma's career in general, it seems he has strong backings from a wide range of powerful people due to financial relations as well as his reputation -- he is the Elon Musk of China and commands tremendous respect and pride among not just citizens but also top leadership.

In fact, his backing is so strong that China's banking and financial regulators have not been successful at regulating Ant despite other fintech pioneers' blatant failings. However, this time he miscalculated how far he can push and the more conservative voices in the party have finally gained an upper hand.

[justicezyx]

Ma was not Elon Musk of China. He was routinely ridiculed for his heavily romanized views on many topics.

No one was surprised by his laughable showing in the chat with Elon at WAI 2019 where he behaves like a fraud.

His backing from powerful hidden political figures are well acknowledged. Although that's not new, anyone who commands such power are backed that way, this pattern can trace back to Qin and Han dynasty.

[Aunche]

If anything that makes him sound more like Elon Musk. Loved by some and ridiculed by others. Also, it's not as if Musk's alarmism about AI is any more grounded in truth than Ma's idealism.

[edgyquant]

No Elon is goofy but Ma proved last year in his sit down with Musk that he doesn’t even have Jr. engineer levels of knowledge. He only has wealth and a name because he has connection while Musk had to be competent to gain his wealth. I do not like Musk but the two aren’t compatible Ma is an actual fraud.

[Aunche]

I think the Elon hate is overblown, but everything he has to say about Covid is outright dangerous, let alone stupid.

Ma isn't an engineer and doesn't pretend to be, which is why you can't take anything he says about AI seriously. I'm sure he's corrupt in the same way a lot of Chinese businessmen are corrupt. That said, you don't go from being a tour guide to building a e-commerce platform with arguably the most sophisticated supply chain the world solely by being a fraud.

[justicezyx]

Anyone have decent understanding of it technology don't like Ma. He was loved more like how Trump lovers love Trump.

[iknowstuff]

Oh yeah that one was painful to watch.

https://m.youtube.com/watch?v=aHGd6LqAVzw

[blackrock]

English is not Jack Ma’s primary language. However, English is Elon Musk’s primary language, and admittedly, he sucks at it.

Jack Ma is competent in speaking Mandarin Chinese. So the equivalent would be to force Elon Musk to debate against Jack Ma in Mandarin.

[justicezyx]

That was not a debate, it was Jack Ma trying to bluff his way to the audience and Musk has to intentionally dumb down himself to not embarrass his fellow billionaire, and failed

[PKop]

> He was routinely ridiculed for his heavily romanized views on many topics.

Many would say the same about Musk

[riffraff]

sorry to ask, but what does "romanized views" mean?

[sporkland]

Romanticized maybe?

[phs318u]

I suspect it means “westernised”

[friendlybus]

Some foriegn languages like japanese have a romanized version where traditional letters are replaced with latin script.

In this case it's a metaphor for westernized.

[justicezyx]

Very poor writing of mine...

[geodel]

> The real question people are asking is why now?

These why now questions unfortunately never have satisfactory answers. Too early: there is no scam/govt is stifling innovation, in the middle: not enough proof, late: why regulators were sleeping till now.

[Congeec]

Maybe some people of power who get involved and want to reap benefits. Maybe the company found in 2013 is too new for the government to catch up. China does not have a long established financial industry like developed countries. State capitalism has just started four decades ago. Maybe Jack Ma knows regulations will come out soon and just made public opinions before regulation rules are revealed to the public.

I do not have any source to back my guesses.

[vagrantJin]

> China does not have a long established financial industry like developed countries

You can make a shady case for modern western idea of finance but China has had a strong finacial industry for centuries.

[paganel]

I also saw that 3B to 300B leverage mentioned in the FT and I was surprised that it didn’t get picked up by the non-economics-related media, they all insist on “Chinese government bad because it didn’t let China’s most successful entrepreneur do his thing”.

We’re talking about a leverage ratio of 100, that’s a crazy figure, if I’m not mistaken Lehman’s leverage ratio when it folded was of “only” 30.

[xster]

According to https://youtu.be/HnCBbiCetSg?t=569, the S-1 equivalent filing of the IPO showed Ant itself putting up 1.68% of its own money towards its lendings. That's way more leverage than the 8% mandated in Basel III.

[hintymad]

It's also worth mentioning that Ant securitized its loans, creating a CDO-like structure. Pretty risky stuff, per my limited knowledge on finance.

[dehrmann]

Either way is a failure for the CCP: it looks bad for letting the offering get this far, or it looks bad to future entrepreneurs for blocking it.

[sudosysgen]

It is indeed a failure letting it go this far without enforcing regulations.

That being said, this mode of failure is ten thousand times better than having the bank fail a few years down the line, so it's clearly by far the better choice.

This should be a wake-up call to the CCP to reduce their cronyism with the billionaire class, but I'm not sure they will take heed.

[bilbo0s]

It's not even cronyism, it's out and out negligence. The ruling class in China is too busy jockeying for position in the plenums to be bothered to enforce the law and rein in billionaires that are running rampant through the Chinese economy. (Which law enforcement is your job by the way. Your job is not impressing your cadre.) These days the business class literally has to be doing something this outrageous to draw any of Beijing's attention.

What will happen is that the rats will scatter and hide for a while until the ruling class goes back to power hunting. At which point they will come back out and begin engaging in similar outlandish behavior while trying not to wake the tiger.

[petre]

Maybe Ma's speech and the IPO was outrageous enough to rise eyebrows and trigger regulatory action.

[russli1993]

in China, these draft regulations goes through many rounds of discussions with government regulators, law makers, and industry stakeholders. There is no way the regulator just popped these out of blue. What extremely likely happened Jack ma, other executives, banks have been discussing and debating about this for a while. Since 2019 Ant has tried to claim they are technology company and they make technology to improve financial services, and they shouldn't be regulated as banks. I tend to think that Ant's approach with big data and having more data on the borrowers' spending habits do allow them to mitigate risks. But on the other hand, the leverage is still very risky. It can be said that an algorithm cant predict everything that goes in the future. What if a black swan event like COVID19 happened and the macro economics goes to shit in a sudden and all your consumers can't pay back the credit. Also keep in mind that a lot of Ant' borrowers are individuals, young adults, and uses it like credit cards. But unlike the US, China doesn't have strong credit score system. And taking credit on Ant doesn't require strict employment vetting, or asking if you own a house that you get when you apply for a credit card in the US. I think COVID19 and the sudden economy collapse also made the regulators realize how much danger there could be and compelled them to push out the rules.

Regulator's point of view is safety by design. Ant can fuck up something like the risk management process and still won't go bankrupt and take the financial sector with it if there is sudden adverse event. Jack Ma thinks its about innovation and he and his company alone can mitigate the risks and the society and the government should just trust them to be the vanguard.

So Jack Ma has irreconcilable views with the government regulators. And he came out to present his views in that meeting. Its not that government saw his comments as challenge the government's authority or something. The regulators would have pushed out the new changes even if he didn't say anything.

[mola]

Well, seems like the US is even more negligible, they let the whole financial system collapse before doing anything about it. It saddens me that a democratic regime became comparatively as corrupt as a totalitarian regime. We cannot let the idea of democracy die because of short sightedness of corrupt business and political leaders.

[cfcosta]

I don't think it is a case of the CCP stopping all entrepreneurs, but a case of them choosing which companies succeed and which fails.

[sudosysgen]

This is pretty clearly the CCP intervening in the economy in order to stabilize it and avoid a financial crisis. I don't think this counts as picking winners and losers. I'm not sure that reclassifying something that is clearly a bank as a bank then enforcing the international agreements it would be bound too is picking winners and losers, it's just regulation.

The issue is moreso that Ma seemed to somehow have captured the regulation to delay this, and only now, with the huge attention, was the regulation enforced.

[xster]

Are you referring to something specific?

[maest]

> assets of 3B lends out 300B

My understanding is that the loans don't go on Ant's books, they just sell them on. In that case, Ant's assets are irrelevant, since they're not the ones taking any risk and, thus, don't have to cover for the losses.

[thedudeabides5]

Even if they are just “warehousing” the credit this would be false, as they need to hold some of those assets on balance sheet while they try to sell them.

This balance sheet is indeed what regulators would require them to hold capital/reserves against.

Further, what’s the documentation that they “just sell them on” end if they do, why wouldn’t their balance sheet shrink??

[maest]

It's not clear what the 300B figure actually is. The OP doesn't mention it and the GP's link isn't explicit.

I can't find a clear source, but it looks to me that 300B is total loans issued, not what Ant currently has on their balance sheet.

> Even if they are just “warehousing” the credit this would be false, as they need to hold some of those assets on balance sheet while they try to sell them.

Yes, they would have to hold _some_ capital reserves, but that number should be based off of whatever they have on their balance sheet at any given time, not off of the total loans issued number.

[thedudeabides5]

https://www.applicoinc.com/blog/ant-financial-services-platf...

Says they have a $250bn mutual fund.

Sorry but even if it's a liability (in this case the deposit that ends up in the money market fund) that's technically...on balance sheet. You can pretend it's in a WMP, or a NCD or whatever alphabet soup you want, but if someone thinks of it as an "Ant deposit"...that's on balance sheet.

[duxup]

Yeah I don't know the full Ma / Ant story.

But that pawn shop comment, man if that's really related to the fact that pawn shops exist because something backs the loan ... and if Ant is really as big as folks say it is (I'm talking about my ignorance here, not anything deceptive) and it is could have a huge impact on Chinese banks.... that's a lot to worry about.

I don't pretend to know China's motivations or etc, but I think there may be very real regulatory concerns.

[wbc]

Where do you get the 3/300B numbers? Didn't see them from the article. If true, that would be an insane amount of leverage.

[Congeec]

Sorry I don't have an English source but translation https://translate.google.com/translate?hl=en&sl=zh-CN&u=http...

[star-trek-fleet]

Ant IPO debacle shows me that the rich and powerful, in the capitalism sense, are incredibly consistent in their thinking; even the one raised up in a communist totalitarian country.

They simply cannot think from any other perspectives that can reveal their fundamental flaws.

Unlike communism authoritarian, who at least can admit the effectiveness of capitalism in mobilizing the society in economy activity.

[sudosysgen]

Ultimately, I think this is a case of the incentive structure and material reality of those people shaping their worldviews and actions.

This shared environment lead them to a worldview where myopic self-interest is the only thing that matters.

In other words, I think the shared material environment dominates culture and upbringing, and leads to transcultural trends here.

[jessaustin]

If the situation is how you describe, the most important question would be: who is holding these securities? If it's just some random Chinese savers looking for higher interest, there is not necessarily a problem. Of course, a similar situation was a problem in the USA context in the previous decade, but that was due to the particular circumstances. Those who had extracted rents by pretending to "insure" MBSs had used a portion of those rents to pwn the USA political structure. When it was clear that MBSs were worthless, they chose to destroy our system of representative government rather than taking bankruptcy. That wouldn't be an option in China, and it certainly wouldn't be an option available to random small Chinese savers.

[trhway]

>If I still cannot make you understand, please google "2008 MBS ABS". You'd be surprised at the similarity of what Ant's been doing and what caused the financial crisis.

blaming financial crisis on ABS/MBS is wrong. Some ABS/MBS may be very risky and it is just fine. The Ant's ABS sound like very risky and it is just fine. An informed investor may as well choose to play with such a risk for a high premium.

The true cause of 2008 was humongous amount of cheaply bought CDS because the underlying MBS were rated AAA which is several orders of magnitude higher then they should have been. It is like a somebody buying for $1 a $1M "life insurance" - basically betting - on a life of a 100 year old person. An insurer selling such insurance (ie. CDS) would quickly go bust like it happened in 2008.