The dramatic China’s stock market crash over the past few weeks has shaken retail investors and some of the damage is starting to come to light. The index dropped 42% from a 52-week high in 21 days. The government has pushed forward a number of measure to try and stem the flow, but it is unclear whether these will have any lasting impact.
The market has recovered slightly, but not satisfied with just 'retail herd mentality' the government is looking to for some sort of culprit to blame for the market tanking, and Alibaba invested fintech capital markets software company Hundsun Technology seems to be it. Hundsun is 20.6% owned by Ant Finance, one of the Jack Ma’s holding, Hundsun’s cloud-based HOMS allows small- and medium-sized trust firms and online lenders to provide a trading platform for their clients.
There is no black and white, only grey
This is considered a grey market activity, but has been profitable for Hundsun as the HOMS platform accounts for about 440 million Chinese yuan of money that has gone nearly directly into the Shanghai market. The CSRC is focusing in on accusations that HOMS incorrectly closed margin-trading positions, increased volatility and led to more selling pressure to the market. Senior staff from Hundsun are cooperating with investigators.
The investigation is an indication of the challenges that Alibaba and Ant Financial will have going forward with their plans for the financial industry. From a strategic perspective, the Hundsun investment / acquisition made a lot of sense. When the investment was made, Ant Financial had already made headway embedding itself in the financial industry through Alipay and the Yu'ebao money market platform. Hundsun opened up a suite of China's most widely used trading software, which Ant Financial could then use for their own retail offerings directly to china's investors, or through platforms like HOMS to other firms.
Stubbing your toe on the line
The acquisition would have been approved in some form by regulators and the government, but unlike MyBank, the initiative wasn't directly encouraged by the government - which is the crux. As Ant Financial continues to dive deeper into the financial industry, they will need to walk a fine line. On one hand, we are in the middle of a tremendous China financial industry land-grab where the tech companies are getting involved in everything from online payments to SME lending, but on the other, they need to balance that with the regulators' need that the industry continues on a stable growth path.
China's capital markets are complex and new, as is margin trading. Although we may never know, Hundsun's software was potentially not up to the task. How can you code and sell margin trading software if you've never done it before? Could a system from Sungard or Bloomberg or Reuters have handled it? Likely, but with the government pushing foreign fintech out, the mature systems that the market really needs have been benched.
How this plays out remains to be seen. Likely there won't be any formal punishment for Ant Financial, but with the recent issues with the Ali Cloud outage and the Alipay outage, I hate to say 'I told you so', but the challenges of integrating all the products and services are finally catching up to the internet giant. It's something that needs to be addressed today and not tomorrow. Redundancy in telecoms and datacenters is Banking 101. Let's hope that Ant didn't cut that class.