Ant and Beijing begin delicate, dangerous dance

Ant and Beijing have begun a delicate, dangerous dance. Having forced the financial technology giant to suspend its initial public offering last month, officials have laid out demands that will curb the company's ability to grow. While the government needs Ant to keeping supporting private firms, that's scant comfort for investors.

In November, founder Jack Ma was hauled in following comments disparaging global financial regulation and new draft online lending rules, ultimately derailing Ant's planned $37 billion public debut. Since then regulators have kept up the pressure, and met with Ant executives over the weekend for another dressing-down in which they lambasted the payments-to-wealth management trailblazer for poor corporate governance, regulatory contempt, taking advantage of its market dominance, and other failings. Officials also spelled out five demands, including better transparency, the creation of financial holding companies and an ominous-sounding suggestion that Ant "return" to its core payments business – a lower margin operation compared to fast-growing online credit and insurance businesses.

The company has established a "rectification" group to implement the new regulatory requirements. Even so, Ant's future is in the air and a government-led break-up can't be ruled out. Hong Kong-traded shares of Alibaba, which owns a one-third stake in Ant, slumped 7% on Monday morning, erasing $40 billion in market value; they are down nearly 30 percent since Ma's ill-fated speech. Shareholders are also anxious about an antitrust investigation into Alibaba's e-commerce practices. The increased share buyback programme of $10 billion announced on Sunday doesn't appear to have reassured them.

Backers who hoped for a windfall exit from an Ant IPO, including private-equity heavyweights Carlyle and Warburg Pincus, will bristle at the prospect of prolonged uncertainty. Still, there's enough room for both sides to manoeuvre. The company recently lowered borrowing limits for some users of its virtual credit card service to rein in risks. And if officials think Ant's expansion has been reckless, they also know it is a key conduit providing credit to small, private businesses, who have been neglected by traditional lenders despite central bankers' best efforts. If excessive harshness forces Ant to pull back, there could be economic consequences. Both partners must move carefully to avoid treading on each others' toes.