Jack Ma, the founder of Alibaba, likes to dream big. As his company prepared for the 2004 launch of Alipay – a clunky online payment service for e-commerce at the time – he told colleagues that "there is an opportunity one day to become China's largest bank," said Porter Erisman. Author of Alibaba & # 39; s World 2015.
This week that dream almost came true – until Beijing decided otherwise. It stepped in at the eleventh hour to suspend the listing of the Ant Group, the direct successor to Alipay. Prior to the suspension, investors had valued Ant at $ 316 billion, dwarfing not only China's largest banks but also the United States.
Why did Beijing take such a drastic step?
From various perspectives, the suspension of a $ 37 billion stock offering – the largest in history – appears to be a separate target for China. Ant's debut should mark the grand finale of a domestic fintech or fintech champion. Confidence in Hong Kong was also expected to be strengthened after Beijing introduced a new security regime this year. The Shanghai and Hong Kong listing should show that China no longer needs US capital markets to fund its world-class companies.
The meaning of Ant should also be geopolitical. The company's IPO reinforced a broader portrayal of China as the technological superpower that took the US global initiative – a symbol of Beijing's resilience to the pressures put on it by Donald Trump's administration.
Given the high stakes, it took Beijing a lot to pull the plug. Mr. Ma and other officers were invited to a dressing by regulators on Monday. However, Chinese leaders' motivation to prevent the IPO is largely based on calculations of political power and status, say Chinese analysts and state bankers.
Mr Ma may be one of China's richest men and its leading celebrity entrepreneur, but his stinging public criticism of Beijing's governance in a speech in October was viewed as unacceptable, they add.
"The Communist Party is pushing back," says Duncan Clark, author of the 2016 book Alibaba: The House Jack Ma Built. “It shows his reluctance to put entrepreneurs off their trail.
“Trade is one thing. Finance is clearly a different one. Jack used the power of the internet to empower the private sector, but applying that chemistry to the financial sector seems to be on another level, ”he adds.
Workers sit next to a mural in an office at the Ant Group headquarters in Hangzhou. © Alex Plaveski / EPA-EFE / Shutterstock
"Pawn Shop Mentality"
An investigation into Mr. Ma's specific transgression – and the context in which it was voiced – reveals much about the nature of China's increasingly authoritarian regime and its determination to shore up its financial system as its rivalry with the United States intensifies. Financial stability – which according to official reports was the target of the ants reprimand – has been a core policy of Xi Jinping, China's leader, since he identified it as a national security issue in 2017.
Mr. Ma's offensive words were delivered in a speech to a high-level forum on October 24th. He criticized China's regulators, accusing the banks, most of which are state-owned, of having a “pawnshop mentality” that requires collateral and guarantees to be renewed. What the second largest economy in the world really needs are courageous new players who can grant loans to poor securities. He went on to say that innovative companies and individuals are often shunned by China's large financial groups.
These were not academic opinions. What few people realized at the time was that Mr. Ma was already in private talks with regulators drafting new rules to deal with China's booming fintech industry, according to several people with knowledge of the situation.
However, the Ant Group denies any talks took place. “The claim is unfounded and pure manufacturing. The Ant Group has fully disclosed the material risks of our business in the prospectus, ”it continues.
A major point of contention in the rules is the amount of capital fintech companies are likely to keep on their balance sheets as a reserve to secure the loans they extend. Oliver Rui, finance professor at China Europe International Business School, says Ant previously raised Rmb 3 billion ($ 449 million) in capital in Rmb 300 billion in loans. However, under the new guidelines, online lenders would have to keep at least 30 percent of the capital on their balance sheets.
"For Ant, this means it may need to find around $ 20 billion in additional capital reserves to secure its current loan portfolio," says a Chinese finance professional who has asked to remain anonymous. “If you think the IPO should raise about $ 37 billion, that's a really big amount of money. No wonder Ma was so excited. "
The headquarters of the People's Bank of China in Beijing. Guo Wuping, a senior central bank official, criticized "Fintech companies abusing their hegemonic position" © Tingshu Wang / Reuters
The regulators are on strike
The problem is critical to the sustainability of Ant's business model, which has already disrupted China's state-dominated financial system. Although the company was founded as a payments company, in recent years it has branched out into several other lucrative areas that were previously dominated by state-owned finance groups like ICBC and the China Construction Bank. The lion's share of his income now comes from a lending business, under which small loans in the amount of Rmb 1.8 billion were granted to around 500 million customers.
However, the draft regulation alone does not explain why the IPO was suspended. Usually, Beijing regulators consult key industry players and, if consensus is reached, announce the new rules, say Chinese bankers. This way, the impact on the market is minimized.
This time, Mr. Ma's intervention changed everything.
"Jack Ma's speech in Shanghai suggests that he wanted to openly challenge the regulator, which is unacceptable," said a senior official at a major Chinese state-owned bank. “That prompted the regulator to announce the rules. The logic for Beijing is, "If I don't understand you and can't control you, I won't let you grow."
Chen Zhiwu, professor of finance at Hong Kong University, takes up this interpretation of the events. "Regulators approved the IPO in the domestic A-share and Hong Kong markets ahead of Jack Ma's speech," he says. “The considerations for the Fintech cleanup would not have been a problem (for the authorities). But everything changed after the speech. . . The Xinhua News Agency publicly attacked Ma.
"The suspension and other actions must be the result of Ma & # 39; s speech," he added.
Regulators were also concerned about the control of customer data by Ant. Guo Wuping, a senior official with the People's Bank of China, this week cracked down on "fintech companies abusing their hegemonic position" in the official media. He added that such companies should use people's data for people's benefit instead of using it to advance their businesses' interests.
China's official line on Wednesday was that the suspension was a required measure. Wang Wenbin, China's Foreign Ministry spokesman, said it was designed to "better maintain the stability of capital markets and protect the interests of investors."
Copies of the Hong Kong Economic Journal featured Jack Ma on the front page at a newsstand in Hong Kong on Wednesday © Lam Yik / Bloomberg
Employees walk past the Ant Group mascot in one of the company's offices in Hangzhou. © Qilai Shen / Bloomberg
What's next for Ant?
The most immediate question arising from Ant's suspension is where all of this leaves a company that was undeniably the leading light in China's tech start-up sector until Tuesday.
Several analysts say that given the star quality of the company and the international expectation that the stock offering sparked, the IPO is unlikely to be permanently suspended. A more likely scenario is that Mr. Ma and the other officers of the company would be brought back into line and required to make public statements showing a degree of remorse.
Given that the final rules for fintech have yet to be officially released, it may take a few months for Ant to change his business model to comply with them. And when that is achieved – and funds are made available to increase the capital base – the company's profit margins can be reduced. The bottom line is that an IPO and future valuation are likely to look very different.
"Ant's regulatory risk is highlighted," said Brock Silvers, CIO of Kaiyuan Capital, a mutual fund. "Taxes could have an impact on the growth trajectory of Ant's domestic lending business, but they are unlikely to quickly and significantly affect the company's prospects."
In a broader sense, Ant's IPO story offers lessons for both investors who have seized China's opportunity and others who wish to understand the changing nature of an emerging superpower.
"Right now, it's okay for a businessman to make money and keep his head down and lie down," says Prof. Chen. “Otherwise it's not good. Jack Ma stuck his head a little too far. Hence the consequences. "
Xi supports the state
Such an interpretation fits China's emerging zeitgeist. As the rivalry with the United States intensified in recent years, Mr. Xi has placed increasing emphasis on strengthening the Communist Party's power in state and state-owned corporations – often at the expense of the private sector.
In November, an agency headed by the president issued a call to make state-owned companies “stronger, better and bigger”. This adjustment was aimed at serving national strategic goals and adapting to high-quality growth, according to an official statement from Xinhua News Agency.
The private sector is now receiving other marching orders. In September, the Communist Party called for better ideological education for people working in the private sector, greater efforts to build parties in private companies, and greater involvement of private companies in national strategies.
"The message is clear," wrote Anna Holzmann and Caroline Meinhardt, analysts at Merics, a Berlin-based think tank. "In Xi's China, the party leads everything."
The Kulturkampf that this heralds is not a good sign for plain speaking entrepreneurs like Mr. Ma or companies like Ant, who have earned their money and reputation since their inception by shaking the state-dominated economic order in China.
Even Ant's name, adopted in 2014 to show that the company wanted to serve "the little fella," bears witness to a legacy that may fall out of favor. In a country where traditional banks are often bureaucratic, Ant provided an easy way for anyone with a mobile phone to pay for things and invest their savings without having to visit the bank.
Xi Jinping (front, center) poses in Washington in 2015 for a photo with technology company leaders, including Jack Ma (front, third left). © Ted S. Warren / Pool / Reuters
The logo of the digital payments company Alipay on the office building of the parent company Ant Group in Shanghai © Hector Retamal / AFP / Getty
The company dominates mobile payments in China through its Alipay app, which brings together over 700 million active users per month with around 80 million merchants and processed around $ 17 billion in payments in the past fiscal year – roughly 24x of the volume recorded by PayPal, the US payment giant.
"Ant's IPO was full of symbolism," said Jeffrey Towson, professor at Peking University's Guanghua School of Management. “It was the world's largest IPO. It only went public in China. It was very innovative, without comparison in the West. And it was suspended days before launch. "
Additional coverage by Hudson Lockett and Primrose Riordan in Hong Kong and Ryan McMorrow in Beijing