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Jack Ma vs Xi Jinping: the future of private business in China

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Four years ago, when Ant Group’s premier money market fund was racing to a peak of more than $260bn worth of assets under management, many of China’s state-owned banks and their regulators started to get agitated. In a series of calls and meetings with Jack Ma, Ant’s founder, bank executives and regulatory officials demanded that its Yu’E Bao fund be reined in.

“Yu’E Bao was pulling a lot of money from the banks,” says one person familiar with the discussions. “The banks were worried about the impact on liquidity and wanted Ant to take measures to minimise the impact. The conversations were pretty tense.”

In the end, Mr Ma had to back down and Yu’E Bao imposed caps on how much people could deposit. Between March and December of 2018, its funds under management fell by a third to $168bn and stood at $183bn last September.

The showdown would prove to be a prelude to the much bigger confrontation that now pits the Chinese Communist party and President Xi Jinping against not just Ant but also Alibaba, the ecommerce group founded by Mr Ma.

The stand-off, which has sparked rampant speculation about Mr Ma’s whereabouts, could become a defining moment for the future of private business in Mr Xi’s China.

On December 24, China’s market regulator announced it was launching an antitrust probe into Alibaba and sent investigators to its headquarters in the eastern Chinese city of Hangzhou, Mr Ma’s hometown. The announcement came just two weeks after the party’s politburo said it would target monopoly businesses to prevent the “disorderly expansion of capital”.

Jack Ma holds the gavel at the New York Stock Exchange in 2014. Mr Ma has not been seen in public since October last year
Jack Ma holds the gavel at the New York Stock Exchange in 2014. Mr Ma has not been seen in public since October last year © New York Times/Redux/eyevine

The move on Alibaba also came two months after financial regulators dramatically cancelled Ant’s planned $37bn initial public offering, which would have been the world’s largest.

Taken together, the measures amount to an unprecedented squeeze on a business empire whose ubiquitous services are central to the functioning of China’s pioneering online economy. Ant says Alipay, its payment app, is regularly used by 700m people — half of China’s total population — and 80m merchants, processing payments worth Rmb118tn ($18.2tn) in the group’s last financial year. 

Alibaba’s shares have fallen by almost 30 per cent since the regulatory showdown began in late October, putting a big dent in the net worth of Mr Ma, who has not been seen in public since then. Over the same period his fortune has declined from $62bn to $49bn, according to Bloomberg data. The Hurun China Rich List estimated that Mr Ma had been the country’s richest man as recently as October 20 but would now rank fourth, his top slot taken by a bottled water tycoon, Zhong Shanshan.

The results of the showdown will say a lot about the sort of economy that China is developing. If Ant and Alibaba are crippled by regulators — or its founder is personally targeted by investigators — it will go down as a landmark moment in the party’s fickle relationship with China’s private sector even though Mr Ma is, ironically, a party member himself.

Since Deng Xiaoping launched the “reform and opening” era 40 years ago, the party has become ever more dependent on private sector companies for economic growth, job creation and tax revenues. But the party’s fixation with control, especially since Mr Xi came to power almost a decade ago, also triggers periodic crackdowns on the sector and prominent entrepreneurs.

Ant Group’s revenue breakdown

Yet there is another potential outcome that would indicate a less fraught relationship between the party-state and business. The investigations into Ant and Alibaba could lead to the sort of settlements that are not dissimilar to those pursued in the US and EU against large finance and technology groups. That would leave Mr Ma’s two flagship companies humbled but still formidable and highly profitable national champions. Even then, a strong political message would have been sent.

“Chinese internet magnates can still enjoy thriving businesses and enormous fortunes if they are able to convince the top leadership of their loyalty,” says Chen Long at Plenum, a Beijing-based consultancy. “The top leadership wants to ensure that neither Ma nor anyone else ever crosses the red line of trying to exert personal influence over government policies again — at least not publicly. The government will support them on the condition that they serve the national interest first.”

Fintech revolution

Mr Ma has not appeared in public since October 24, when he gave a high-profile speech critical of the same state-owned banks he clashed with over Yu’E Bao’s rapid growth, as well as regulators who he said often sacrifice innovation on the altar of stability. According to people involved in the listing, the speech angered Mr Xi, who made the final decision to halt the Ant IPO.

A woman views a QR Code at an Ant Group stall in Shanghai. The move against Alibaba came two months after Chinese financial regulators cancelled Ant’s planned $37bn flotation
A woman views a QR Code at an Ant Group stall in Shanghai. The move against Alibaba came two months after Chinese financial regulators cancelled Ant’s planned $37bn flotation © Feature China/Barcroft Media/Getty
Jack Ma with the winners of his 'Africa’s Business Heroes' TV competition in 2019. The usually high-profile Mr Ma missed the November final of last year's contest
Jack Ma with the winners of his ‘Africa’s Business Heroes’ TV competition in 2019. The usually high-profile Mr Ma missed the November final of last year’s contest © africabusinessheroes.org

“To innovate without taking risks is to strangle innovation,” Mr Ma said. “There is no such thing as riskless innovation in the world. Very often, an attempt to minimise risk to zero is the biggest risk itself.”

He was speaking at the same forum where Wang Qishan, Mr Xi’s powerful vice-president and former anti-corruption tsar, had earlier emphasised the paramount importance of financial system stability. “Efforts should be made to prevent and lower financial risks . . . security always ranks first,” Mr Wang said. “While new financial technologies have improved efficiency and brought convenience, financial risks have been heightened.”

In an unprecedented public rebuke of Ant two months later, on December 26 China’s central bank criticised Ant for being too cavalier about financial risk and taking advantage of regulatory loopholes. But as frustrated as regulators are with Ant, they cannot ignore the beneficial effects of the financial revolution it has led in China.

“Ant Group,” People’s Bank of China vice-governor Pan Gongsheng admitted in his otherwise critical comments, “has played an innovative role in developing financial technology and improving the efficiency and inclusiveness of financial services”. The central bank, he added in a nod to jittery entrepreneurs, was also “unshakeable” in its commitment to “protect property rights and promote entrepreneurship”.

Consumer and SMB loan volume enabled by Ant compared with major Chinese banks

Mr Ma has long enjoyed support from officials in a range of State Council ministries, as well as the lead financial regulators, who appreciate the contributions of Ant, Alibaba and their rivals, all of whom have transformed China’s economy and made its online services sector a global leader. When his status as a party member was first confirmed only two years ago, it was in the context of an award he was receiving from the party’s Central Committee for “making China a leading player in the international ecommerce industry, internet finance and cloud computing”.

Alibaba and Ant’s ecommerce and online payment services were even more critical at the height of China’s successful battle to contain coronavirus, providing essential services to the hundreds of millions of people caught in draconian lockdowns.

“There are different lines of thought within the regulators,” Mr Chen says. “Until Jack Ma’s speech the pro-growth people had the upper hand. But Xi thought the speech was too much and a second [risk-averse] group took the lead. If his speech hadn’t happened, everything would have been fine.”

Disappearing acts are unusual for Mr Ma, who also missed the November finale of his African reality TV show — Africa’s Business Heroes. He routinely gives flamboyant musical performances at Alibaba events and hobnobs with heads of state and government leaders.

People’s Bank of China vice-governor Pan Gongsheng tried to calm jittery entrepreneurs when he said the central bank was 'unshakeable' in its commitment to 'protect property rights and promote entrepreneurship'
People’s Bank of China vice-governor Pan Gongsheng tried to calm jittery entrepreneurs when he said the central bank was ‘unshakeable’ in its commitment to ‘protect property rights and promote entrepreneurship’ © VCG/Getty
China's president Xi Jinping with other world leaders at the G20 summit in Hangzhou in 2016. Mr Xi was said to be irked that some guests sought meetings with Jack Ma during the event
China’s president Xi Jinping with other world leaders at the G20 summit in Hangzhou in 2016. Mr Xi was said to be irked that some guests sought meetings with Jack Ma during the event © Sergei Guneyev/TASS/Getty

As China’s most successful private entrepreneur, Mr Ma enjoys unique status in China — and overseas. His fluent English has made him a huge celebrity on the international conference circuit, with a star quality unmatched by any of his private or state-sector peers.

When Mr Xi hosted the G20 leaders summit in Hangzhou in 2016, some of his guests also visited Mr Ma — something that irked the Chinese president, according to one diplomat involved and other people familiar with the matter. Mr Ma’s VIP callers included Indonesian president Joko Widodo, Canadian prime minister Justin Trudeau and the then Italian premier, Matteo Renzi. Foreign leaders were offered limited time slots and the Chinese foreign ministry was mostly cut out of the process.

Over the past week rumours about Mr Ma’s whereabouts have abounded on China’s carefully monitored social media channels, while domestic media outlets have received strict instructions from censors about the stories they can and cannot run on Ant and Alibaba’s regulatory troubles.

Many of Mr Ma’s friends and colleagues strongly dispute suggestions that he is personally in any sort of legal jeopardy, let alone on the run. “He is in China and not travelling because of Covid, not anything else. He’s lying low,” says one friend of Mr Ma.

Alipay, Ant Group's flagship superapp

Another friend who communicates with Mr Ma regularly adds: “Everyone is asking me if he’s in danger, but he’s doing fine. He responds [to messages and calls] quickly and seems like he’s in good spirits. Discussions with regulators are still very much in process so he just has to stay quiet until they are resolved.”

Leadership missteps

Friends add that while Mr Ma may now regret the consequences of his October 24 speech, he meant what he said and still believes passionately in what he sees as Ant’s mission to transform the provision of financial services in the world’s second-largest economy.

Yu’E Bao, which translates as “account balance treasure”, was started in 2013 and allowed anyone in China, from restaurant staff to the urban yuppies they serve, to deposit as little as Rmb1 ($0.15) in a money-market fund and earn more interest than they could in a Chinese savings deposit account. Just four years later it became the world’s largest money market fund, surpassing JPMorgan’s US government money market fund.

The fund’s success was a dramatic demonstration of Ant’s potential. But it was also a threat to one of China’s most powerful vested interest groups — state banks and the officials who regulate them. The central bank was also concerned. In its annual financial stability report published in late 2019, the PBoC said it would “strengthen regulation of systematically important money market funds”, without mentioning Yu’E Bao by name.

A screen at a shopping event in Hangzhou shows Alibaba's number of delivery orders last year. The company's shares have fallen by almost 30% since the regulatory showdown against it began in late October
A screen at a shopping event in Hangzhou shows Alibaba’s number of delivery orders last year. The company’s shares have fallen by almost 30% since the regulatory showdown against it began in late October © Wang Gang/China News Service/Getty

“When a taxi driver can deposit one renminbi in a money-market fund and get interest, that’s a big breakthrough,” says a former Alibaba executive. “Jack feels what Ant is doing is good for society.”

Mr Ma’s companies have rebounded strongly from regulatory disputes before, although Ant and Alibaba never faced scrutiny as intense as they now do. Ant’s run-in with banks and regulators over Yu’E Bao, for example, did little to hinder its overall business or influence.

Ant’s credit business grew so large that it now facilitates about one-tenth of all of China’s non-mortgage consumer loans.

The group also aligned its interests with those of powerful investors. Ant’s first fundraising in 2015 brought in a slew of well-connected shareholders, all of whom were set to be rewarded handsomely in the IPO. The Chinese government’s social security fund and a group of state-owned insurers held stakes in Ant valued at, respectively, Rmb48bn and Rmb45bn at the IPO price.

Shares belonging to an investment vehicle put together by Boyu Capital, whose executives have included the grandson of former Chinese president Jiang Zemin, were valued at Rmb15bn. Even China Central Television, the country’s state broadcaster, held Ant shares worth Rmb3bn.

“Financial regulators have been very concerned about Ant’s growing power and ability to push back against any attempts to bring it under control,” says one Chinese government adviser. “Previous attempts to bring Ant under more control were not really working because it was so big and so powerful. There is now clearly a very dramatic shift.”

Jack Ma in 2018 at a ceremony in Beijing to mark the 40th anniversary of China's opening up. Mr Ma fell foul of the authorities after giving a speech in which he was critical of state-owned banks and regulators in October last year
Jack Ma in 2018 at a ceremony in Beijing to mark the 40th anniversary of China’s opening up. Mr Ma fell foul of the authorities after giving a speech in which he was critical of state-owned banks and regulators in October last year © Mark Schiefelbein/AP

Bill Deng, a former Ant executive and co-founder of XTransfer, a cross-border payments platform, says Mr Ma may have become too confident.

“For a long time, regulators let Ant expand and I think [management] became a bit too complacent,” he says. “If there are hundreds of people praising you, you can get overly optimistic. Financial deleveraging policies have been a trend for several years now and the government is extremely careful when it comes to finance.”

Healthy growth

The cancellation of Ant’s IPO triggered a cascade of official and state media criticism of the fintech group. Regulators have also made clear they want the group to shift many of its businesses — including payments, lending, insurance and wealth management — into a new, more tightly regulated holding vehicle. This will increase Ant’s capital requirements and lower its valuation.

Authorities see the holding company model as a way to rein in large financial conglomerates while increasing their transparency. They also want Ant to share its vast trove of consumer data with the central bank — something it has refused to do before.

Having to wait for a smaller return than they almost locked in a few months ago will be disappointing for Ant’s investors, but there are worse alternatives. “The Chinese government does not want to kill Ant, but to make sure it grows in a healthy way,” says Mr Deng. “Ant can surpass its current obstacles. If they have patience, they will be able to rise again.”

As for the antitrust investigation into Alibaba, a manageable outcome for the group would include an end to exclusivity arrangements that restrict merchants from selling on rival platforms. Alibaba could also potentially face a large fine — the maximum allowed would be 10 per cent of its previous year’s revenues — if it is deemed to have violated China’s anti-monopoly law.

“Debates about exclusivity have been going on for years, it’s a competitive market,” says the former Alibaba executive. “I don’t think Alibaba is going to get broken up. It’s just that the methods by which they fight for the market are going to be more regulated.”

Additional reporting by Sherry Fei Ju in Beijing and Jamil Anderlini in Hong Kong



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Coronavirus latest: Boris Johnson extends lockdown restrictions in England to July 19

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New York state has the lowest seven-day average Covid-19 positivity rate at 0.44 per cent, governor Andrew Cuomo said, citing Johns Hopkins University data.

On Sunday, the state health department said 383 new positive cases were identified from 110,437 tests – a rate of just 0.35 per cent.

“We’re beating back Covid-19 across the state and New York has the nation’s lowest seven-day average positivity rate, but it’s going to take more vaccinations to get us across the finish line,” Cuomo said.

The state plans to offer “exciting incentives” for vaccinations, he added.

Cuomo said more than two-thirds of New York adults – 67.2 per cent – now had at least one vaccine dose, and 60 per cent were fully vaccinated.

“I encourage everyone eligible who hasn’t yet been vaccinated to take advantage of a free $20 lottery ticket.”

Scholarships in the State University of New York system and City University of New York were also being offered.

The number of new coronavirus cases tallied in the US has remained near levels not seen since the early days of the pandemic, an encouraging decline that has prompted some states to scale back their daily reporting of Covid-19 trends.

Infections, hospitalisations and deaths related to Covid-19 have dropped sharply since a winter surge, brought down by a vaccination rollout that kicked off in December. 

Overall about 64 per cent of American adults have now received at least one shot, according to the Centers for Disease Control and Prevention.

The US has reported 15,928 infections per day in the week ending June 10, which is down about half in the span of one month and 94 per cent from a January peak of nearly 251,085, based on a Financial Times analysis of figures from Johns Hopkins University.



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Hong Kong-Taiwan spat threatens cross-Strait business

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Official representation between Hong Kong and Taiwan is set to end this year as mounting political tensions threaten one of the region’s most important trade and investment relationships.

The number of staff in Taiwan’s representative office in Hong Kong has dwindled over the past two years as the territory has stopped issuing visas, with the documents of those who remain due to expire by the end of November.

Hong Kong also abruptly suspended operations of its representative office in Taipei two weeks ago, ending its official presence there. The stand-off has grown so severe that Taipei has begun making contingency plans for a situation without on-the-ground representation in Hong Kong, two senior Taiwanese government officials said.

The breakdown in relations follows rising military tensions between Taiwan and China and a crackdown by Beijing on pro-democracy groups in Hong Kong that has led some activists in the territory to seek refuge in Taipei.

China claims Taiwan as part of its territory and has threatened to annex it if the island fails to submit to its control indefinitely.

Analysts said that cutting official channels would undermine Hong Kong’s traditional role as a conduit for business and financial exchanges between Taiwan and China. Despite the dispute with Beijing over sovereignty, Taiwanese companies are among the largest foreign investors, employers and exporters in mainland China.

Taiwan air force personnel during the visit by President Tsai Ing-Wen
Military tensions between China and Taiwan have escalated, but investment and trade across the Taiwan Strait remains important to both countries © Ritchie B Tongo/EPA-EFE/Shutterstock

A significant part of trade across the Taiwan Strait trade goes through Hong Kong, and many Taiwanese investors in China also use Hong Kong for financial, taxation and legal purposes. Last year, Taiwan was Hong Kong’s second-largest trading partner, while Hong Kong was Taiwan’s fifth-largest, with HK$504bn (US$65bn) in total bilateral trade. Taiwanese companies invested US$912m in Hong Kong in 2020, while Hong Kong-registered companies invested US$555m in Taiwan.

“Hong Kong has been a springboard for Taiwanese companies into mainland China and it has also been a springboard for Chinese [companies] into Taiwan,” said Liu Meng-chun, a research section director at the Chung-Hua Institution for Economic Research, a Taiwanese government-backed think-tank.

Tensions between Hong Kong and Taipei have escalated over the past two years after the territory started demanding Taiwanese diplomats sign documents declaring their country part of China as a precondition for being issued a visa.

After Taipei refused, the number of staff at its office in Hong Kong began to dwindle, from 20 to eight today, according to the Mainland Affairs Council, Taiwan’s cabinet level China policy body.

Hong Kong, meanwhile, said it was temporarily closing its Taipei office because “Taiwan’s series of actions in recent years has severely damaged Hong Kong-Taiwan relations”.

A Hong Kong government official suggested the suspension came on instructions from Beijing.

“I think Beijing is of the opinion that [Taiwan’s representative office] affects national security,” said Sung Yun-wing, an economics professor at the Chinese University of Hong Kong, who is also a member of a semi-official think-tank, the Chinese Association of Hong Kong and Macao Studies, in Beijing.

“There have been reports that Taiwan has been encouraging the protest movement in Hong Kong, which has turned violent, so the protest movement is not only against the Hong Kong government but also Beijing,” said Sung. He added China was also concerned Taiwan was “sheltering” Hong Kong protesters.

While Taipei has been careful to avoid being seen as making it too easy for Hong Kong dissidents to flee to Taiwan, civil society groups in the country have supported the protest movement with advice, money and logistics. “This is something we cannot interfere with as they have done nothing illegal,” said a senior Taiwanese China policy official.

Historically, Hong Kong’s most important economic role in the Taiwan-China trade has been as a sea and air trans-shipment hub for Taiwanese companies to supply their factories in southern China with components.

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While analysts suggested that much of this commerce could continue even if official ties between Taiwan and Hong Kong were severed, they foresaw a sizeable impact on financial services, tourism and education.

“Hong Kong plays a very important role for Taiwanese private wealth management,” said Patrick Chen, head of Taiwan research at CLSA, the brokerage.

He said many Taiwanese individuals had accounts in Hong Kong, where the local units of Taiwan’s banks offered them offshore investment products not accessible under the island’s stricter regulations.

Liu of the Chung-Hua Institution for Economic Research said many Taiwanese enterprises kept profits from their China operations with their Hong Kong affiliates for tax purposes.

“These things would become a lot more cumbersome without official representation because you would have to start sending documents back and forth for notarisation,” Liu said.



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Nato leaders fret China’s Atlantic ambitions

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China’s growing military and economic presence in the Atlantic region is expected to trigger a rare warning from Nato leaders about the potential security threat when they meet on Monday, diplomats said. 

From joint Chinese drills with Russia to western worries that China wants to set up military bases in Africa, the Nato focus reflects China’s primacy among western foreign policy concerns, in particular those of US president Joe Biden.

“This is not about ‘Nato going to China’,” said Claudia Major, a defence analyst at the German Institute for International and Security Affairs. “It’s about ‘China is coming to Europe and we have to do something about it’.”

In 2015, joint military drills with Russia brought the Chinese navy into the Mediterranean and the heart of Europe for the first time. Since then, China has built up the largest naval fleet in the world and invested in critical European infrastructure, including ports and telecoms networks.

“China [through its navy] has come through the Indian Ocean, into the Gulf, up to the Red Sea and they’ve been in the Mediterranean,” according to one British military official, who said China had not yet deployed submarines in the north Atlantic but could do so in future.

“You build nuclear submarines for range and stealth. And China does like to test the boundaries.”

The planned joint statement by the transatlantic security alliance, which diplomats said was still under discussion and subject to change, would be only the second time that Nato leaders have addressed the subject of China head-on. The first was in December 2019, at the insistence of the administration of Donald Trump.

But Biden is understood to be pushing for tougher language than the bland “opportunities and challenges” terminology used that time.

Nonetheless, how to deal with the issue represents a dilemma for the 30-member group, which was originally set up in 1949 to deal with cold war-era threats.

Internally, Nato countries are divided over how to treat China: member Hungary, for one, has good political relations with Beijing.

In addition, there is reluctance to confront Beijing in its own Pacific region — although the UK and France have followed the US in deploying ships to carry out freedom of navigation exercises in the South China Sea.

Chinese and Russian marines take part in joint exercises in China’s Guangdong province
Chinese and Russian marines take part in joint exercises in China’s Guangdong province © Li Jin/Getty

China’s joint military operations with Russia are viewed as a particularly unwelcome development by some Nato members. As well as their annual military exercises, Beijing and Moscow have recently added joint missile defence drills and training for internal security forces.

“Their [the Chinese/Russian] relationship is transactional and pragmatic rather than ideological,” the UK military official said. “But working together in any form provides confidence. And confidence is something we should be wary of.”

As the Center for a New American Security, a bipartisan US think-tank, warned in a January report: “Where Russian and Chinese interests align, Moscow and Beijing could eventually co-ordinate their combined capabilities to challenge US foreign policy.”

Another Nato anxiety is Africa, which China could use to expand its military presence in the Atlantic as part of its long-term goal to become a truly global armed force.

Gen Stephen Townsend, head of US Africa Command, told the US Senate in April that his “number-one global power competition concern” was what he described as Chinese efforts to establish a militarily useful naval facility on Africa’s west coast. “I am talking about a port where they can rearm with munitions and repair naval vessels,” he said.

Experts on the Chinese military said there was no evidence that Beijing was trying to establish such a west African base, yet. However, China has a base in Djibouti and has already used international anti-piracy missions in the Gulf of Aden to train thousands of military personnel and to build military relations with countries outside its usual neighbourhood.

Each time a naval contingent finishes deployment, for example, it typically takes a detour on the way home. Some have visited the Mediterranean and the east and west coasts of Africa.

Another trend vexing Nato allies is the growing involvement of Chinese companies in critical infrastructure in Europe, such as through telecommunications company Huawei.

Chinese state shipping company Cosco also owns a controlling stake in Piraeus, Greece’s largest port, and is reportedly in talks to invest in a Hamburg port terminal.

Such economic ties complicate Nato’s efforts to create a unified approach on China — as do the political relationships between Beijing and friendly European leaders.

That creates the potential for clashes, with the tougher stance of Washington and Jens Stoltenberg, Nato’s secretary-general, who last month warned that China was “coming to us” in areas including cyber space, Africa and the Arctic.

“There is a risk that having this discussion within Nato surfaces very uncomfortable differences between allies on how much China is actually perceived as a threat,” said Sarah Raine, an expert in geopolitics and strategy at the International Institute for Strategic Studies.

“The fact is that there are countries which are seen by hawks as making very pro-China arguments within Nato, at least with regards to being robust but not confrontational.”

Additional reporting by Katrina Manson in Washington



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