Has Alipay become a state-owned enterprise?

Jack Ma's promise to cede control was made official when the the People's Bank of China (PBOC) approved Alipay's application to not have a controlling shareholder.

According to a statement from the central bank, the PBOC has approved the application to remove any controlling shareholders at Ant Group's Chinese payment platform Alipay, which was established in 2004. This news sparked interest because it means that the main obstacle to Ant Group's IPO has been eliminated.

The change at Alipay began with the shareholding structure adjustment of its parent company, Ant Group, in early 2023. Alibaba founder Jack Ma's shareholding was reduced from 53% to 6.2% so that no shareholder, alone or jointly with other parties, could have control over Ant Group.

The approval of Alipay's application to not have a controlling shareholder a year later means that China's central bank has acknowledged Ant Group's shareholding adjustment.

According to China's media reports, Cathay Insurance and the listed Hundsun Technologies, which are related to Ant Group, have also published notices on 29 December 2023, announcing a change of management structure to not have controlling shareholders.

According to China's Measures for the Administration of the Takeover of Listed Companies, the absence of a controlling shareholder means that the ownership structure of listed companies is distributed so that there is no controlling shareholder with more than 50% shareholding, that there is no actual control of more than 30% of voting rights of the company's shares, and that no single director or senior executive is in control of the company's major financial and business decisions.

For Alipay, which has not yet been listed, having no controlling shareholder means that no shareholder holds more than 30% of its shares.

In fact, a company structure without a controlling shareholder is very common. According to statistics by Jiemian News, only eight of the 42 A-share listed banks in China have controlling shareholders, which are absent in the other 34. Manufacturing enterprises, such as Gree Electric Appliances, also do not have controlling shareholders.

Securities Times quoted industry analysis saying that the relatively distributed voting rights is a more modern corporate governance model that decentralises power to achieve good checks and balances in order to prevent the dominance of a controlling shareholder.

Decentralisation of power as well as checks and balances are also the key phrases in Ant Group's adjustment measures following the suspension of its IPO in 2020.

In 2020, China officially suspended Ant Group's IPO, worth US$38 billion (about S$52.02 billion). In November 2020, the financial regulatory authorities urged Ant Group to rectify its business structure, and implemented an overhaul of the internet sector to prevent disorderly expansion of capital.

Subsequently, Ant Group undertook reforms to trim its business, open up resources, strengthen regulations and control risks. Specific actions included shutting down the non-compliant mutual aid platform "Xianghubao", setting up Ant Consumer Finance to take over online loan business such as Ant Credit Pay and Ant Cash Now, keeping its personnel and data separate from those of Alibaba Group, as well as injecting state capital. The biggest move was Ant Group's founder Jack Ma ceding control in January 2023.

In July 2023, the central bank announced Ant Group's completion of its rectification of the outstanding issues and the imposition of a 7.1 billion RMB (US$992.7 million) fine. Regarding this as a signal of the end of Ant Group's rectification, investors have started to anticipate the resumption of its IPO. The central bank's approval of Alipay's status of not having a controlling shareholder now is considered to be another critical step before the IPO.

Caixin reported that although Ant Group announced its shareholding adjustment in January 2023, Alipay is a third-party payment institution that is subject to the central bank's regulation. Therefore, after Ant Group has completed the structural adjustment of its major shareholders' voting rights, Alipay must apply for the central bank's approval and thereafter make an announcement. This approval is also a signal of Ant Group's successful rectification and incorporation into the financial system's regulations.

Previously, the main obstacles to Ant Group's IPO were financial security risks and regulation. Analysts believe that with the fundamental removal of these obstacles, Ant Group's IPO will be back on the agenda. Moreover, under the current structure of no controlling shareholder, the company's decision-making on major issues will be more dependent on its company management and the regulatory authorities.

However, in the short term, Ant Group would still be unable to meet one IPO requirement - that there should be no change to the controlling shareholder within three years.

If Ant Group wishes to list on China's A-shares market, it may have to wait another three years. If it chooses to list on the Shanghai Stock Exchange STAR Market or the Hong Kong Stock Exchange, it has to wait two years and one year respectively.

Since the news of the central bank's approval broke, some market analysts have claimed that no controlling shareholder implies a "state takeover". Netizens have resurfaced Jack Ma's words, that "at any time, Alipay will be handed over to the state as long as the state needs it", claiming that "Father Jack Ma's words have become a prophecy".

In fact, Ant Group has had state capital injection in its rectification. A week before Ant Group announced that Jack Ma would cede control of the group, Ant Consumer Finance had a 10.5 billion RMB capital increase, of which the Hangzhou state-owned HFI Digital Technology contributed 10% to become the second largest shareholder. In October 2023, Ant Consumer Finance increased its capital again, with Chongqing's Yufu Holding becoming a 4.041% shareholder among the disclosed shareholders.

However, the injection of state capital does not mean becoming a state-owned enterprise (SOE). What brings Alipay closer to state regulation is the nature of its national payment tools.

According to public information, Alipay has opened up its payment technologies to merchants and provides billing services, which have become a long-term and mature business model that currently serves 80 million merchants and one billion consumers.

This has made Alipay akin to a basic utility, like water and electricity, in the Internet world. Alipay will neither be controlled by a single shareholder or private enterprise, nor can it merely make profit for shareholder benefit like ordinary enterprises. Its public service role must be underscored.

Third-party payment transactions in China continue to increase year after year. According to iiMedia Research, third-party payment transactions will amount to 561.9 trillion RMB in 2023, a year-on-year increase of 14.5%. As China's largest third-party payment platform, the change in Alipay's governance structure will be instructive and lead the way for the industry.

Many financial bloggers have commented that WeChat Pay, the other major payment platform similar to Alipay, will eventually be regulated in China. This will be similar to the regulation of all banks in the era of cash and bank cards.

The Communist Party of China Central Committee's central financial work conference has made its fundamental mission to "forestall and defuse financial risks, especially systemic financial risks". The authorities have also promulgated the Rules on the Supervision and Administration of Non-Bank Payment Institutions, which will upgrade the supervisory practices of non-bank payment institutions to law-based administrative regulations and strengthen the comprehensive supervision of payment institutions.

Currently, e-payment is part of Internet "infrastructure development" closely linked to the wallets of one billion users, and its regulation is self-evident. Whether Ant Group's future IPO is successful, it must comply with the financial regulations. This is also the change required of other payment platforms in future.

In an environment of robust regulations in China, it is not possible to distinguish whether this type of "Internet infrastructure" enterprises are traditional SOEs or private enterprises.

This article was first published in Lianhe Zaobao as "支付宝变更为无实际控制人意味着什么？".

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