Don't bank on it

China's planners spread confusion in web finance

Beijing's planners are sowing confusion in China's internet finance sector. Regulators have barred foreigners from investing in an online-only bank backed by web behemoth Tencent. It's not clear if the rule extends to other online finance groups like Alibaba's Ant Financial affiliate - or even who counts as a local investor. The uncertainty will curb valuations and initial public offering (IPO) options.

The decision is a blow to WeBank, the first internet lender in the People's Republic. It was set up by Tencent early in 2015 as part of a pilot scheme to open up the state-dominated financial sector. In January, WeBank was close to raising $450 million from investors including Singapore's Temasek and U.S. private equity group Warburg Pincus at a valuation of $5.5 billion, according to The Wall Street Journal. But the China Banking Regulatory Commission ruled out an injection of foreign capital, according to a person familiar with the matter. As a result, WeBank is now raising money from local investors at a lower valuation, the Wall Street Journal reported on June 6.

The question is whether other online financial groups face the same restrictions. Ant, controlled by Alibaba boss Jack Ma, recently raised $4.5 billion at a reported valuation of $60 billion and is gearing up for an initial public offering. It also owns a Chinese internet bank.

Chinese companies are used to dealing with uncertainty. For example, regulators have yet to finalise laws on so-called variable interest entities - the legal contracts that many tech groups with overseas listings use to get around investment restrictions. Tencent and Alibaba are listed outside China and have major international shareholders, but to date there has been no sign that regulators treat them as foreign. Besides, the latest restrictions don't seem to extend to offline banks: HSBC owns a large stake in Bank of Communications, China's fifth-largest lender.

For Tencent and Alibaba shareholders, though, regulatory uncertainty in Chinese internet finance is another risk to contend with. Alibaba has an option to take a stake in Ant if it goes public which would be worth just shy of $20 billion at the latest valuation. Beijing's latest ruling throws this agreement into question. It's a reminder that ambiguity is here to stay.