For investors stunned by the last-minute shelving of Ant Group’s $35 billion IPO on Tuesday, it is worth rewinding to the Bund Summit in Shanghai last week.
Jack Ma, Alibaba’s founder and a major shareholder in Ant, was giving a keynote speech in the presence of some of the nation’s most senior financial figures, such as Zhou Xiaochuan and Yi Gang, the former and current governors of the Chinese central bank. The gathering this year was themed around ‘Crisis, Reform and Opening-Up’ and Ma’s speech was supposed to be a curtain-raiser to the world’s largest ever IPO as Ant geared up for a dual listing in Shanghai and Hong Kong.
He was in combative form. “Chinese banks nowadays still operate with a ‘pawn shop’ mentality,” he explained. “Good innovations should be not afraid of supervision. But they are afraid of being supervised by yesterday’s regulations.”
In particular Ma took aim at the tendency of the state-owned banking heavyweights to demand collateral before giving out loans (see WiC516 for our first mention of the remarks). Loan requests from those who cannot meet their criteria – typically unbanked individuals and smaller businesses – are part of the growth engine of Ant Group’s business model, which draws on newer capabilities in AI and Big Data to identify credit risks. But Ma was effectively calling for a revamp in the regulatory regime, adding that the Basel Accords – “a club for the elderly”, he scoffed – and claiming that the internationally agreed banking rules should not always apply in China.
With retail investors eagerly awaiting Ant’s mammoth IPO, the remarks were soon getting wide play in China and Hong Kong. International media outlets took note as well and many went back to 2008 for a similar statement where Ma issued a controversial challenge to the state banking giants (“If the banks don’t change, we will change the banks”: see WiC181).
Things were still looking pretty rosy for the Ant IPO at that point. Yet many of the reports overlooked the presence of Chinese Vice President Wang Qishan (the former head of the country’s feared anti-graft body and also a veteran financial regulator) at the same summit. Just a few hours before Ma’s keynote speech, Wang had made prerecorded opening remarks at the same gathering. And he was delivering a message that seemed to clash with what Ma was about to say.
China’s financial services industry should stay away from the “wrong paths” of speculation and “self-circulating financial bubbles”, Wang had warned. Efforts should be made to ensure that the financial sector serves the real economy, with the government attaching “equal importance” to the twin forces of financial innovation and stronger regulation.
Wang’s speech was later cited by Financial News, a daily newspaper run by the People’s Bank of China. The same outlet then spent three consecutive days after the Bund Summit talking about the risks arising from “large internet enterprises going into the financial industry” and the need to regulate Chinese fintech.
On Monday news broke that four senior government bodies, including the central bank, the banking regulator, the securities regulator, and the state agency managing foreign currency exchange had invited Ma and a couple of his senior Ant executives for a ‘supervisory interview’. When a firm is informed that the authorities want a yuetan, it is usually because civil servants are upset or want a commercial decision to be shelved or reversed (see WiC374). Indeed, on the same day, financial regulators jointly issued draft rules tightening restrictions on microlending (a core Ant operation). The proposed new rules – subject to change upon “market consultation” – aim at introducing stricter standards for online financing activities including leverage levels and cross-province business. There are reports that the sudden rule change is what has triggered Ma’s verbal attacks on regulators and state banks at the Bund Forum.
And a day later the stunning announcement was made that the Shanghai stock exchange had postponed Ant’s IPO because of “significant changes” in the regulatory environment of the fintech sector.
The Hong Kong stock exchange subsequently shelved Ant’s Hong Kong offering too. That was despite more than 1.55 million investors applying for stock in the IPO – beating the record set by banking giant ICBC in 2007. The offering had frozen up nearly HK$1.3 trillion ($167 billion) in liquidity, setting another record.
No wonder onlookers were dumbfounded and many came to the conclusion that Ma’s speech at the Bund Summit was to blame for derailing the IPO. Certainly he seems to have irked financial regulators and SOE banking officials. As China’s banking heads follow policy directives set at the highest levels of government, Ma’s remarks could also be taken as a criticism of China’s most senior leaders, whether he intended it or not.
“The Communist Party has shown the tycoons who is boss. Jack Ma might be the richest man in the world but that doesn’t mean a thing. This has gone from the deal of the century to the shock of the century,” Francis Lun of GEO Securities, a Hong Kong brokerage, told Reuters.
Chinese media has largely refrained from discussing the contrast between the speeches from Wang and Ma. State outlets have preferred to suggest that the last-minute reversal was a carefully-considered decision. That seems a little unlikely amid all the embarrassment that the cancellation has created. Additionally, Ant’s IPO was the biggest listing so far on Shanghai’s STAR Market, which has adopted a so-called “registration-based system” to vet IPO applications. That means the Shanghai stock exchange gives the green light to a listing as long as the company in question fulfills all the necessary disclosure requirements. Ant’s predicament says something rather different, suggesting that the CSRC will still intervene at the eleventh hour.
No doubt Ant executives will have tried to make the case that their business model is designed to diminish the chances of reckless lending by digging deeper into the data that the company holds on millions of its prospective customers. That skillset could still prove effective in expanding financing opportunities to less well-off individuals and SMEs. Yet the fact that Ant passes on the making of the loans to partner banks on its platform – who may then repackage the resulting credit risk back into the financial system, perhaps as wealth management products – will have worried financial regulators too.
Of course, the same regulators will have studied Ant’s operating model for some time, which doesn’t explain why the IPO was only torpedoed at the last moment.
Social media was soon flooded with comments trashing Ant’s lending model. Many questioned whether it is making it too easy for younger people to borrow, which could lead to overspending and dangerous new levels of personal debt. A “mixed” banking model, such as one that brings together banks and brokerages, sowed the seeds of some of the worst financial crises of the past, Financial News warned. Ant’s Alipay has already grown into an “integrated financial services platform”, claiming the title as “the most mixed-up financial institution in the world”, the newspaper reckoned.
Attention will now shift to how Ant might revive its IPO, with Hong Kong Economic Times reporting that it might take six months for the company to come back with another listing application. There is no certainty that market conditions will allow for the same hefty valuation as this month, the newspaper added.
Ant might also be forced into a revamping of its business model that resolves some of the regulatory concerns. Until now, Ma has been pretty adept at staying in sync with the Chinese government. But now he is going to have to prove his loyalties once again. That’s why another of his better-known quotes had started to make the rounds on Thursday. “If it is needed, we are prepared anytime to give Alipay [Ant’s digital payments tool] to the country,” he once told local media.
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