Ant Group Expands Overseas But Still Hampered By The State

Executive Summary:

• Ant Group’s strategy since the fallout from its canceled IPO in 2020 and subsequent crackdown on the fintech sector has seen it seek opportunities while capturing projects within the People’s Republic of China (PRC) that are aligned with government priorities.
• Key markets for the initial phase of regional expansion include South Korea, Pakistan, and Singapore, but there is significant overlap between Alipay’s development overseas and the One Belt One Road (OBOR) initiative and the Digital Silk Road (DSR) Initiative.
• Within the PRC, Ant is investing record amounts Artificial Intelligence research and development and claims to be actively responding to develop “new quality productive forces.”

On June 5, Ant Group, the financial technology (fintech) unit of Chinese technology giant Alibaba, announced it would partner with Mongolia’s Khan Bank to bring its mobile payment services to the country (Hawk Insight, June 6). Given that Mongolia’s population of just 3.28 million is approximately one-eighth the size of Shanghai and its tourism appeal is limited, its addressable market is small (Shanghai Securities News, March 21; CIA World Factbook, accessed July 10). For Ant, however, even small international markets show more promise for its core fintech business than its home turf in the People’s Republic of China (PRC). Ever since the Hangzhou-based company’s dual initial public offering (IPO) in Shanghai and Hong Kong was abruptly canceled in November 2020, it has been struggling under the weight of the ruling Chinese Communist Party’s (CCP) sustained crackdown on consumer internet companies. According to an analysis published by digital media company Sohu, Ant’s profit fell 92 percent on a quarterly basis to RMB 242 million ($33.3 million) in the third quarter of 2023 (Sohu.com, February 21). Following a July 2023 share buyback, the company was valued at RMB 567.1 billion ($78.5 billion per the exchange rate then), a steep drop from its $315 billion valuation on the eve of its abortive IPO (Central News Agency, July 8, 2023).

PRC President Xi Jinping likely personally ordered the IPO suspension over concerns about how its proceeds could benefit political rivals affiliated with former CCP General Secretary Jiang Zemin (SinoInsider, February 17, 2021). However, Xi has also voiced skepticism of private sector firms he sees as focused on profit maximization and which do not contribute to the so-called “real economy” of physical goods and services (South China Morning Post [SCMP], May 6, 2023). In a January 16 speech to the CCP’s Party School, Xi called for fostering a “financial culture with Chinese characteristics,” which avoids “a single-minded focus on profit” and “prevents funds from being diverted out of the real economy.” (Beijing Municipal Government, January 17).

The crackdown on technology companies that began with the suspension of Ant’s IPO has yet to end, however. The company has paid about $1 billion for regulatory violations. It is also continuing government-mandated restructuring that has included the dilution of founder Jack Ma’s voting rights from more than 53.5 percent to just 6.2 percent (STCN, December 30, 2023). A key development occurred in March when Ant moved to restructure its operations into three independent business units. Notably, one of these units focuses on the company’s international operations, which are concentrated in Asia but have begun expanding further afield, including into the West. Along with strategic investments in technologies favored by Beijing, Ant sees this global expansion as its best hope for future growth.

Ant Group’s Overseas Expansion Continues Apace

Ant Group’s international expansion pre-dates the PRC’s fintech crackdown but it has accelerated in tandem with a worsening business environment at home. The company is mainly focused on developing a cross-border payments network called Alipay+ that facilitates interoperability among participating digital wallets. There are currently more than 25 e-wallets in the network, most of which are based in Asia (Alipayplus.com). Alipay+ offers convenience to travelers by reducing the need to download additional payment apps while merchants are able to accept more payment methods through a single network. According to data provided by Ant, Alipay+ has 1.5 billion consumer accounts and 88 million merchants on its network (Infocast, April 2). Although the company does not break down these numbers by geography, it is understood that most of its customers are Chinese given that Alipay does not yet have significant market share outside of the PRC.

A key market for Alipay+ is South Korea, a top destination for Chinese tourists and the PRC’s fifth-largest trading partner. (The PRC, meanwhile, is Seoul’s top trading partner.) With investments in two of Korea’s largest digital wallets, Kakao Pay and Toss Pay, Ant is well-positioned to expand in the country. At a press conference held in Seoul in December 2023, Ant said that Alipay+ transactions at offline merchants in Korea grew by more than 700 percent in the first 10 months of the year and that the network now encompasses 1.7 million merchants in Korea (The Korea Times, December 12, 2023). Ant Group has a similarly growing payments network in Southeast Asia, Pakistan, and Sri Lanka. Though Ant is not making an explicit connection between Alipay+ and the PRC’s OBOR, the company is nevertheless involved in Xi Jinping’s massive infrastructure project. In 2017, Ant signed an agreement with the United Kingdom’s Standard Chartered Bank to collaborate with countries participating in the OBOR (Ta Kung Pao, December 19, 2017).

Pakistan is a promising market for Ant given its large unbanked population, estimated at more than 100 million adults, and its historically close relationship with the PRC (The Express Tribune, March 29, 2023). Ant first gained a foothold in Pakistan in 2018 when it purchased a 45 percent stake in the Pakistani microfinance bank Telenor for $184.5 million (Sina, March 13, 2018). In April, the Chinese company signed a deal with the Pakistani digital payments firm NayaPay, allowing the latter’s users access to Alipay’s merchant network in the PRC. NayaPay CEO Danish A Lakhani described the partnership as “a monumental milestone in the commercial relationship between China and Pakistan as we witness the establishment of the first direct payment channels between our two nations” (Business Recorder, April 10).

In 2022, following a lengthy approval process that coincided with its regulatory difficulties within the PRC, Ant launched a digital bank for businesses in Singapore called ANEXT. While Singapore is a mature, ultra-competitive financial services market, ANEXT could cultivate a niche given the growing Chinese corporate presence in the city-state. The importance of ANEXT to Ant can be seen in the substantial investments it has received, including $188 million in March 2023 and $148 million in March 2024 (Baijing.cn, March 30, 2023; Baijing.cn, March 26).

Alipay’s expansion overseas has an added strategic dimension. It aligns with Xi’s stated emphasis on goals of seizing the opportunities presented by the digital economy and financial technology to secure a leading position in future global development (Baijiahao, July 5). Alipay aims to dominate emerging markets and facilitate the international use of the digital RMB as part of the government’s Digital Silk Road initiative, which is part of the broader One Belt One Road Initiative (OBOR) (MOFCOM, September 19, 2023). It is already creating an inclusive digital financial ecosystem among OBOR partner countries (China Comment, December 12, 2019; 81.cn, April 10, 2023; Zaker, July 10). This expansion helps boost RMB internationalization as well as enhance transaction traceability for the People’s Bank of China, the country’s central bank—something that could raise privacy and surveillance concerns globally (Haokan, February 20, 2022).

Ant Group’s Pivot To Appease At Home

Ant Group has doubled down on financial technology investments overseas, but back home in the PRC it has sought to capture a different kind of market opportunity that is more aligned with the preferences of the country’s leadership. In its 2023 Sustainability Report published in mid-June, Ant said that it had spent a record RMB 21.2 billion ($2.9 billion) on research and development last year, highlighting investments in artificial intelligence (AI). In the report, Ant CEO and chairman Jiang Xiandong (井贤栋) said that the company would prioritize the development of AI technologies and “actively respond to the call of new quality productive forces” (Ant Group, June 5).

The term “new quality productive forces” has appeared consistently in Xi’s speeches and state media since it first emerged during Xi’s September 2023 inspection tour of Henan (Henan High People’s Court, September 11, 2023). Li Yuju (李玉举), deputy director of the Xi Jinping Economic Thought Research Center at Peking University, told the state-run China News Service in June, “Future industries,” mainly concentrated in areas including AI, new energy, and life sciences, “are crucial forces for reconstructing the global innovation landscape, reorganizing global resources, reshaping the global economic structure, and altering global competitive dynamics” (Accesswire, June 29). In June, Xi sent a congratulatory letter to the 2024 World Intelligence Expo held in Tianjin, in which he said that “China attaches great importance to the development of AI” and works to integrate the internet, big data, and AI with the real economy. He also called on the PRC to “speed up the development of new quality productive forces, so as to provide new driving forces for high-quality development” (MOHRSS, June 21).

Ant, meanwhile, has been busy trying to capture business opportunities from the CCP’s interest in AI. Earlier this year, shortly after the news broke the company had set up a new dedicated AI unit, Ant signed a strategic cooperation agreement with the Shanghai Municipal Government to support the development of the city’s AI and blockchain ecosystems (SCMP, January 25; People.cn, February 1). This agreement followed Ant winning approval last November to release products powered by its “Bailing” AI large language model to the public (Shanghai Securities News, November 6, 2023).

Ant Group is steadily recovering from its nadir in 2020. Its government-mandated restructuring has progressed, while overseas expansion is proceeding smoothly, and it is exploring new opportunities in Beijing’s preferred technologies. The company’s profit margins have suffered under the weight of the crackdown though, and it is far from certain that its AI ventures will pay off to the same extent as its investments in financial technology. By the end of June 2020, it had processed RMB 2.1 trillion (US$310 billion) in consumer and business loans. Yet due to restructuring and associated restrictions on its lending activities, Ant has lost a key growth driver—a new consumer finance company it established in Chongqing is required to fund 30 percent of the loans it makes with partners, while banks are not permitted to originate more than half of their total loans from online firms. A calculation by Reuters in early 2023 found that Ant could disburse about RMB 500 billion ($69 billion ) in credit with its partner banks, less than 25 percent of its loan balance in 2020 before its IPO was suspended (Reuters, Feb 9. 2023).

Ant Group’s connections to the state mean that the PRC’s strained ties with the West and India could complicate its international expansion efforts. When Ant acquired the UK money transfer firm WorldFirst in 2019, the company had to first shut its operations in the United States in order to forestall the $900 million acquisition from being blocked by US lawmakers (Financial Times, January 31, 2019). More recently, the US Department of the Treasury has issued new proposed regulations for outbound investment screening in “countries of concern” of technologies deemed critical for national security, including AI (US Department of the Treasury, June 21). Meanwhile, Ant has been gradually paring down its stake in the prominent Indian financial technology company Paytm. In August 2023, Ant swapped about half its equity investment in the company for convertible debt, which reduced its holding to 13.5 percent and increased founder Vijay Shekhar Sharma’s to 19.4 percent (Sina, August 11, 2023). The People’s Daily-owned Global Times said, “The move comes as Chinese investment faces increasingly biased scrutiny by the Indian government” and accused New Delhi of “a repeated malicious crackdown on Chinese companies” (Global Times, August 7, 2023).

Conclusion

Since November 2020, Ant Group has shown that it is too big to fail in the eyes of the party-state, but not too big to be cut down to size. The company remains a major player in the PRC’s financial services and technology sectors but must contend with lower profit margins and a reduced scope of business within the PRC. It is trying to realign its domestic business with Xi Jinping’s preference for companies that support the real economy and technologies Beijing prioritizes, such as artificial intelligence.

Given the intensifying technological competition between the United States and the PRC, Ant may try to reinvent itself in its home market as a key player in Beijing’s push to become a dominant AI power. However, Ant’s core business remains digital financial services, and it can be expected to continue expanding its overseas operations—especially in countries that have amicable ties with the PRC like Pakistan and Singapore as well important economic partners like South Korea, even if this expansion will be constrained to some degree by geopolitical tensions. Alipay’s­ expansion is also a strategic move to align with the PRC’s Digital Silk Road and OBOR initiatives, promoting digital RMB and enhancing transaction traceability, which could raise global privacy concerns.

The resumption of its IPO process would be a potential game-changer for Ant Group and would signal to investors and business partners that the company had fully emerged from regulatory scrutiny. There has been no indication that this will happen soon, however, and Beijing would have to see a clear benefit in allowing the listing to go ahead. For now, it is likely to continue keeping Ant on a tight leash.