Shares of Alibaba (NYSE: BABA) are trading about 30% higher in the last 4 weeks on several positive news from China.
Ant Group Situation Improving
The relationship between Alibaba Group and Ant Group has dwindled since last year, years after very close collaboration between the two Chinese giants. Ant Group, a Chinese financial technology behemoth, was spun off from Jack Ma’s Alibaba in 2011 but the two companies have continued to cooperate intimately to increase their competitive market advantage.
However, the ties between Ant and Alibaba have weakened since last year after the companies introduced new measures to establish operational boundaries.
Ant’s journey begins back when Alibaba rolled out a payment service Alipay in 2004 to take advantage of the emerging e-commerce market in China.
Seven years later, Alibaba announced the spin-off of Alipay, a decision that was loudly criticized by Alibaba’s investors such as Yahoo, which raised concerns that potential new regulations would ban foreign investments in China-based financial services companies.
But that did not prevent Ma from spinning out Alipay, which shortly expanded into an insurance and wealth management services provider known as Ant Financial. In 2020, the company changed its name again to Ant Group.
Following the spin-off, Ant agreed to pay 37.5% of its pre-tax profits to Alibaba – an agreement that came to an end in 2019 when Alibaba purchased a 33% stake in the fintech giant.
Even though he left his executive and board roles at Alibaba, Jack Ma still controls Ant Group and remains a life-long member of Alibaba Partnership, which consists of a group of top executives that have a claim to nominate most of the e-commerce giant’s board.
Despite setting certain operational boundaries, Alibaba and Ant have noted their synergies several times in the past. In its prospectus filing with the Hong Kong exchange in 2020, the fintech company said its collaboration and synergy with Alibaba represents one of its most important competitive advantages and its “origin and continued affiliation with Alibaba is a source of strength as well as purpose”.
This synergy was demonstrated in the companies’ apps, with Alipay being the primary payment option on Alibaba’s apps such as Taobao and Ele.me.
The successful teamwork between the two companies also attracted potential partners. In 2018, U.S. coffeehouse company Starbucks introduced its first official online delivery service in China with what it called the “Alibaba ecosystem”.
In addition, Alibaba and Ant were co-investors in several deals over the past few years. The duo injected $200 million each into the ride-hailing giant Didi Global in 2016, and co-led a $280 million funding round for the bike-sharing startup company Hello Inc.
Regulatory Crackdown Easing
Earlier this month, Chinese regulators started discussing the possibility to revive Ant’s initial public offering (IPO), nearly two years after the watchdogs suspended Ant’s record $37 billion listing in Shanghai.
According to a recent report by Bloomberg, China Securities Regulatory Commission (CSRC) has created a new team to consider reviving Ant’s IPO, which was initially supposed to launch in November 2020 before the government unexpectedly halted the deal just prior to the market debut.
The suspension marked the start of a ruthless regulatory clampdown on China’s internet and tech companies. But the potential revival of Ant’s IPO could mean that the crackdown is coming to an end as the government looks for ways to prop up its slowing economy.
The regulators are also close to ending their investigations into Didi Global and two other Chinese companies and are reportedly set to bring back their app to local app stores.
The Chinese authorities halted Ant’s IPO and opened a probe into the fintech company shortly after its founder Jack Ma publicly criticized the country’s regulators for stifling innovation.
For many investors, positive developments surrounding Ant Group and Didi are signs that the regulatory environment in China is improving.
Alibaba shares are trading higher lately to reflect improving risk sentiment surrounding tech giants.