Encouraging Chinese consumers to buy products on easy credit was sensationally popular, until it wasn’t. Benjamin Liu and Xin Chen of the University of Auckland explain the troubles facing Jack Ma’s Ant Group.

China has been leading the world in the exponential growth of e-commerce. Rising from this massive and highly competitive e-market is Alibaba, the most popular online shopping platform in China today.

Facilitating Alibaba’s ever-expanding digital ecosystem of buyers and sellers is its giant financial arm, Ant Group. Through its mobile payment and consumer credit tools, such as Alipay, Huabei (meaning Just Spend), and Jiebei (Just Borrow), the giant “Ant” has got its legs into virtually all corners of Chinese society and all aspects of everyday life, both online and offline. 

Rock star founder of Alibaba and the Ant Group Jack Ma has meanwhile become an iconic household name throughout China. It came as no surprise that the sudden halt of Ant Group’s initial public offering (IPO) by the Shanghai and Hong Kong Stock Exchanges in early November 2020 captured wide attention from many sectors of Chinese society. Baidu, China’s most popular web search engine, listed more than 16 million comments, analyses, and discussion pieces on the incident.

Among the topics of heated discussion is the nature of Ant Group’s business. Is it a finance company, a technology vendor, or something else? This question was triggered by reference in Ant’s IPO suspension announcement that Jack Ma and his team endeavoured to list the company on the newly launched Sci-Tech Innovation Board (STIB) of the Shanghai Stock Exchange.

The Ant Group has certainly been a champion of employing advanced digital technologies to facilitate financial transaction and accessibility, risk assessment, and wealth management.  However, its financial reports continuously attest to the fact that the company’s business and revenue model is predominantly lending money and collecting interest and service fees.

The Ant Group’s IPO prospectus says the company’s net profit between January 2019 and June 2020 exceeded 38 billion yuan (US$5.8 billion).  It also indicates about 40 percent of earnings came from its online micro-lending services, which made up the largest source of its income. What it does not specify, however, is that its consumer-lending targets are predominantly millennials, in particular tertiary students and new graduates, often without regular income. University campuses across China are among the Ant Group’s most rewarding hunting grounds for profits.

Students and other young Chinese ‘netizens’ are perhaps the reason why Jack Ma and his team got into the consumer lending business in the first place. A typical example is how Jack Ma and the Ant Group have turned China’s unofficial Singles’ Day, celebrated on November 11, into a super Double 11 online shopping festival. This one-day shopping extravaganza attracts 800 million Chinese consumers and five million businesses including 25,000 companies from across the globe. 

If the 2020 Black Friday of America harvested a record $9 billion from consumers, the 2020 Double 11 is reported to have generated a gross merchandise value of US$56 billion. As with all previous Singles’ Day festivals, young participants thanked their adored “Ma Baba” (Papa Ma) and his Just Spend and Just Borrow apps for enabling them to be part of the shopping frenzy.

However, since the Ant Group’s IPO halt, ever greater public resentment flooding the Baidu search engine focuses on claims that “Ma Baba” has fooled young Chinese netizens with his “inclusive finance” claim and “empowered” them to overdraw their financial future with the Just Spend and Just Borrow software tools. It has been alleged that Ma and his team have set a very low borrowing threshold for the two apps to exploit the fact that about 70 percent of the population aged 15 and above in China does not have a credit card. The two digital micro-lending platforms have quickly become extremely popular among Chinese in-store and online shoppers of Generations Y and Z.  In 2018, for example, short-term consumption loans granted to consumers of the post-90s generation exceeded RMB 3 trillion (US$465 billion), about one-third of China’s total short-term loans of that year.

Yet few in the huge trend-chasing, life-style-minded, foodaholic/foodie but “monthly-overdraft” crowds are believed to know much about the Ant Group’s market strategies. There are claims young consumers are being “duped” by the 0.4 percent to 0.5 percent daily interest charge of their cash advances. They overlook that, when multiplied by 365 days, the seemingly low interest rate offered by their adored “Papa Ma” jumps to about 15 percent per annum, or 18 percent if they cannot pay their loan balances on time. 

Worse still, China’s self-indulgent millennials and centennials may not realise that one of the alleged reasons why online micro-lenders like the Ant Group are willing and ready to accommodate their consumption “cravings” is because their doting parents are expected to provide a safety net for their loans.

Not surprisingly, more and more Chinese decry the Just Spend and Just Borrow offerings as today’s opium of young people for excessive materialism and conspicuous consumption. They appeal for urgent government and societal attention to regulate digital micro-lenders, especially since China’s household debt to GDP ratio has more than tripled since 2009, reaching 59.7 percent in June 2020. They also urge Chinese millennials and centennials to demonstrate some sense of responsibility when enjoying the handouts of their prized Just Spend and Just Borrow apps to help avoid trapping their parents in the cycle of their debts.

Besides public pleading, popular online discussions increasingly focus on issues related to the missing link of reasonable, manageable and sustainable consumption in China’s online and offline shopping chain. A loud and repeated warning bluntly notes that by becoming a universal and systemic norm, the “spend-tomorrow’s-money-today” model may affect China’s overall economic trends and outcomes.

A worst-case scenario frequently mentioned is a subprime credit crisis prompted by a major unexpected incident that causes widespread economic uncertainty and hardship, and results in defaulting of micro-loan repayments and the bursting of the debt bubble. No one would want a credit crisis triggered by consumer lending to occur in China. Not even “Papa Ma”.

Dr Benjamin Liu is a senior lecturer in Commercial Law at the University of Auckland Business School.

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