Tread Carefully, JD Finance

By  for Bloomberg

A week after lauding Inc.’s finance affiliate for moving into new and growing businesses (auto insurance), I should probably pause to add a caveat: tread carefully.

Chinese regulators have begun investigating JD Finance over allegations it breached securities laws. The arm of the unprofitable e-commerce provider allegedly underwrote unapproved securities via its “Bai Na” service, Bloomberg reported on Friday, citing people familiar with the matter. Other possible infractions include misleading and defrauding customers through its promotions, according to the report.

This brings to mind Baidu Inc.’s brush with controversy last year. Except that instead of a brush, the search-engine provider careened head on into trouble with customers and regulators because of its medical and health-care advertising. The result was a drop in sales and a plunge in share price, from which it recovered. What Baidu is still struggling to come back from is the damage to its business model as stricter rules hit advertising and limit the pool of companies that can conceivably promote services on its sites.

JD Finance is operating in a very crowded market, which is why the move into auto insurance makes sense. Yet pushing the envelope in areas such as peer-to-peer lending and investment products is a strategic risk that doesn’t always swing a company’s way.

It looks like JD Finance saw the storm coming, saying in a statement that it “temporarily stopped offering one product in January as part of our ongoing efforts to improve customer experience.” The company also told Bloomberg that it conducts strict oversight to ensure legal compliance.

Whether or not JD Finance broke the law, or is alone in doing so, is almost irrelevant. The fact is that they’re now in regulators’ sights and that could crimp expansion as executives ensure every i is dotted and every t crossed.

When Baidu was ensnared last year, I argued the company will come out stronger. The stock’s 18 percent rise from a post-controversy low shows that to be correct. The same might be said for JD Finance, but first it needs to get through the storm and hope it doesn’t lose significant ground to competitors in the meantime.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

First appeared at Bloomberg