Potential US Sanctions on China’s Ant Group Could Have Repercussions

October 11, 2020 Updated: October 11, 2020

News Analysis

As Chinese payments giant Ant Group prepares for the biggest IPO in history, possible U.S. sanctions could rain on its parade.

According to media reports, the Trump administration has signaled that it’s looking into restrictions for the two biggest Chinese digital payment apps, Ant Group’s Alipay and Tencent’s WeChat Pay. Of the two, actions against Ant Group—backed by Alibaba founder Jack Ma—could have ramifications across a variety of sectors.

The concern is that these digital payments systems might affect U.S. national security, Bloomberg reported on Oct. 7—specifically, the risk that as Chinese payments apps expand across the globe, including in the United States, personal financial data of U.S. customers could be routed back to China.

Mobile payments are commonplace in China but are still a nascent industry in the United States. Given Ant and WeChat’s track record in China, the United States is concerned that if left undeterred, the service could expand quickly, potentially creating another TikTok-like conundrum.

On Oct. 9, Sen. Marco Rubio (R-Fla.), a China hawk, urged the U.S. government to investigate options to delay Ant’s widely anticipated IPO.

Biggest IPO

Ant is preparing an IPO that could raise more than $35 billion, in a dual listing in Hong Kong and Shanghai that could value the firm at up to $250 billion. The company’s potential IPO would eclipse Saudi Aramco’s $29 billion share sale, completed last year. If realized, Ant’s valuation could dwarf that of several major international banks, including Bank of America Corp. and Citigroup Inc.

Currently, U.S. investment banks Citigroup, Morgan Stanley, JPMorgan Chase, and China International Capital Corp. are the main underwriters for Ant’s stock listing.

The scope and extent of potential sanctions—if they are enacted—are still to be determined. At this moment, it remains to be seen whether the restrictions would affect the U.S. banks’ ability to work on Ant’s IPO, if at all. It’s also unclear if sanctions would prevent U.S. investors from buying into the IPO. Given Ant’s size, its shares should eventually make their way into equity indexes that have allocations for China’s A-shares.

Ant Group’s Relationships With Foreign Firms

While the vast majority of Ant’s revenues come from domestic Chinese consumers, the company has expansive business partnerships with U.S. companies that could be upended in the event of sanctions.

Vanguard, the large U.S. investment manager, has a joint venture with Ant to sell investment advisory services to Chinese customers. But more recently, Vanguard’s China strategy has been dealt a setback after Charles Lin, its regional CEO, abruptly resigned in 2019. Several other senior Vanguard executives in China also recently left the firm.

Ant has a few partnerships with U.S. consumer companies, though most of them mainly impacted consumers inside China. For example, Intel and Ant signed a partnership in May 2020 to help Chinese small and medium-sized enterprises lease IT equipment.

But in 2019, Alipay signed a major deal in the U.S. market with drugstore Walgreens—the biggest U.S. store chain to accept Alipay as a form of payment. At the time, the partnership was announced to make it easier for Chinese tourists to spend money in the United States. The Trump administration is no doubt viewing the Walgreens deal as a precursor to more partnerships with U.S. consumer-facing companies.

In Europe, Ant has several payments partnerships locally to streamline usage of Alipay by Chinese tourists, including Barclaycard in the UK, MOMO in Spain, and Bluecode in Austria.

A Boon for US Providers

A potential ban on Alipay or WeChat Pay could be a boon for domestic incumbents. While around 95 percent of Ant’s revenues come from China—with the remainder coming from the rest of Asia and Europe—it can scale quickly in a new market.

Companies such as PayPal (and Venmo, which is owned by PayPal), Square, Zelle (co-owned by several U.S. commercial banks), and technology giants Apple and Google (which have their own mobile payment solutions) could all benefit from a ban on Chinese apps. Credit card platforms such as American Express, Visa, and MasterCard would also hold onto their existing share of the payments business.

Alipay and WeChat Pay are formidable competitors with decades of experience in China and could expand quickly in the United States.

But the threat of Ant Group could be much bigger than that of TikTok’s. TikTok is a social-media platform focused on teenagers, and so far it has had limited monetization capability and no direct competitor.

The potential of a global digital payments solution—with the infrastructure and scale of Alipay and WeChat Pay—might have profound consequences for not only U.S. national security, but also the future of U.S. financial and technology companies.