China’s stock market rout may disrupt online finance pioneers. Regulators have targeted Hundsun Technologies, an $8 billion trading technology company backed by Alibaba founder Jack Ma, over the recent sell-off. Internet finance in China has long flourished in legal grey areas. If official attitudes are hardening, it will be riskier and pricier for Ma and peers to innovate.
Beijing authorities have zeroed in on Hundsun’s electronic trading platform, HOMS. This is part of a wider crackdown on unregulated margin trading, which they blame for amplifying the recent stock market rally and sell-off. The system is being singled out for matching firms outside of China’s brokerage system, so-called grey market lenders, with speculators borrowing to buy stocks.
Days after the securities regulator visited Hundsun HQ, the company has stopped opening new HOMS accounts and banned new deposits into existing accounts. The stock has cratered since peaking alongside the market in mid-June. As of July 16 it had fallen nearly 60 percent.
The read-across to Hundsun’s largest shareholder, Ant Financial, is worrying. This is Ma’s internet finance empire, which extends from online payments to a privately owned bank, and was recently valued at $45 billion. The immediate financial impact will be small: Ant holds just 20.6 percent of Hundsun, and doesn’t use the trading platform in its operations, according to people familiar with the company.
Yet much of Ant’s success rests on expanding into legally untested areas. The rapid rise of Yu’E Bao for instance, Ant’s $115 billion online money-market fund, required regulators to turn a blind eye. Same goes for other online financial innovations like crowdfunding. Even though draft regulations only emerged in December, companies from e-commerce site JD.com to property group Dalian Wanda are already dabbling.
Keeping Beijing close probably helps. Ant has the backing of China’s state-owned National Social Security Fund, Reuters has reported. And this might be a special case because of HOMS’ trading focus. But if regulators feel they need to rein in new products and technology that could mean lengthy approval processes, onerous and expensive regulation, or even outright bans. Talk about disruption.