AUTHORS

GIACOMO BOCCHIO VEGA

giacomo.bocchiovega@edhec.com

An overview of what happened

Surely, it has been one of the news that has most put the whole financial world in turmoil during the last months, indeed, it doesn’t happen every day that the already announced biggest IPO in the history is suspended at the eleventh hour. Ant Group, the financial services company owned by Jack Ma, the founder of Alibaba, was ready to debut on the Hong Kong and Shanghai stock exchange on November 5th, 2020 until when, two days before the launch, the Chinese regulators slammed on the brakes and blocked the stock market listing of the company. 

The Ant’s initial public offering was set to rise $37bn from investors who had valued the company at $316bn, crowning it as the most valued bank in the world, exceeding even the peers made in US. 

In the following graph we can see the market capitalisation ($bn) of the main world’s bank. Ant group, would have resulted as the most capitalised bank, overcoming JPM by a thread.

Source: Financial Times

This IPO was going to show to the world the huge power and solidity reached by China in the fintech sector, sending a clear message to the Trump administration and threatening the American hegemony in this field. It is clear to everyone that in the last years the political relations between United States and China are not exactly a bed of roses, especially after the start of the Trump’s presidency. Donald Trump openly considers China as an enemy and no longer as a business partner, pursuing a policy of tariffs and barriers on Chinese products and services in order to halt China’s growth. Therefore Ant’ IPO could have claimed China’s power despite the American obstacles.  

Given all these amazing perspectives brought by Ant’s listing, a question arises, why Beijing decided to suspend it?

What Ant Group is

First of all, let’s understand why Ant Group had such a huge valuation among the investors and why its listing on the stock exchange was about to be a crucial revolution for the future of the Chinese banking system.

Ant Group, name established in the 2014, is an affiliate company of the Alibaba Group and is the re-branding of Alipay, the world’s largest online payment platform with 1.3 billion users all around the world. Alipay born in 2004 as a third-party online payment tool, created by Alibaba in order to solve the issue of trust between buyers and sellers on the main platform. Exactly what eBay did with PayPal, which Alipay overtook in 2014 for total number of users. Then, Alipay began as a simple escrow service to secure transactions between users. Shortly afterwards, Jack Ma, in collaboration with the Industrial and Commercial Bank of China and Sun Microsystems, started to build an online banking system from scratch since the Chinese infrastructures were very basic at that time. By 2010, Alipay worked already with over 200 banks and started to become very convenient even outside of Alibaba platform, thanks to its low commissions compared to regular payment systems like POS machines. Beyond online payments, Alipay started to expand its business creating new services for the users, such as wealth management, lending, credit scoring and insurance. With the creation of Ant Group, Jack Ma’s company became a real financial services provider. More in detail, within the new holding company we can find services such as Yu’e Bao, a money market fund platform, which allows even small customers to invest, and thanks to this policy, it soon became one of the largest fund of this kind in the world. Sesame Credit is a social credit evaluation system, which creates credit score profiles for borrowers and offers financial advices. MYBank exploits AI to lend to small firms that are not served by large banks. Xiang Hu Bao is a mutual insurance platform that provides affordable healthcare for low-income workers and Ant Micro Loan is a micro-loan provider. All these innovative systems are the reason why last November so many investors were ready to put their money on this innovative service company.

Main reasons and actors of the IPO suspension

As said before, on November 5th Ant Group’s IPO was ready to realize Jack Ma’s objective of reaching the status of China’s largest bank and revolutionising the Chinese financial system, which is very focused on financial stability and high regulations for lending capacity. Indeed, Mr. Ma has always been quite critical about Beijing Government’s view of finance, and on October 24th, he expressed his disagreement during a public speech in Shanghai. Mr. Ma accused the many Chinese state-owned banks of having a “pawnshop mentality”, since they required too many collaterals and guarantees to extend credit, also adding “there is no systemic financial risks in China because there is no system in China”, and “we cannot use yesterday’s methods to manage the future and we cannot manage an airport the way we manage a train station”. Indeed, Jack Ma strongly believes that China’s banking system needs new players able to lend to those with little collaterals in order to sustains innovative companies and little entrepreneurs. After this speech, Chinese regulators decided to go all the way in, introducing the new regulations that have led to the suspension of the stock exchange listing of Ant Group. This was last Jack Ma’s public appearance, and since then it is officially detained by the Chinese investigators on charges of putting his own interests above those of the state. Some media believes that Jack Ma was already aware of these possible new limiting rules and that is why he said those words attacking the Government, but Ant Group denied of being previously aware of the situation.

The Wall Street Journal argued that the President Xi Jinping personally scuttled Ant IPO, in fact the relationship between Mr. Xi and Jack Ma has never been idyllic, especially in the last years due to the exponential influence and power that the celebrated entrepreneur achieved thanks to Alibaba’s success and to the last overbearing entry into the financial sector. What the government didn’t like of Mr. Ma’s new business is the open challenge to the Chinese banks by starting to extend credit to businesses and to manage private capitals through its platforms, which are the services that have now become  the core of the total revenues of Ant Group, amounting to approximately 55%.

In the following pie chart we can see the revenue breakdown of Ant Group on the 30th June. CreditTech and InvestmentTech are sources of more than half of the total returns of the company.

Source: Bloomberg

Regulators argued that the low limitations on the granting of credit for tech companies brough Ant Group to provide unsecured loans with an average interest rate of 11% to its consumers, which is almost the double of the one small borrower can get from banks. Guo Wuping, head of consumer protection at CBRIC, stated: “these low regulations caused young and low-income people to fall into debt traps, ultimately harming consumers’ rights and interests and even endangering family and society”. He also questioned the use of the customer data done by Ant saying that tech companies should use data to benefit customers and not for economic interests.

All this concerns form the Government institution about Ant’s business model led to the announcement of new regulations about online macro lending, aiming to equalize the financial technology companies to the traditional banks of the country. The new rules were established only a few days before the initial public offering of Ma’s company and changed substantially its way to do business. The newly introduced regulations that affected the most Ma’s business are:

  • Capital contribution to a joint loan shall not be less than 30%
  • New requirement of registered capital and deposit insurance

Unti now, Ant Group had to keep only 2% of the loans amount in its balance sheet. Therefore, it is obvious that the new rules imposed a dramatical changed of business model for Ant Group, due to its around $300bn in consumers and small businesses loans, the company might have to find approximately $20bn extra in capital reserve to comply with the new requirements, considering that the IPO was about to raise around $37bn, this was a huge problem for the company. The obligation to change its financial structure led the company to step back from its listing, bringing several problems to many investors and financial institutions that worked on the IPO and that were ready to make huge profits, such as JP Morgan, Morgan Stanley, CICC and Citi.

What comes next

We saw the several reasons why this historical IPO, which could have shown the world the ultimate power achieved by the Chinese financial market, has been suspended. So far, there is no crystal-clear explanation from either side of the reasons for the blockade. But, analysing what happened in those tumultuous days  and the declarations from members of the Government and Ant Group’s stakeholders, we may interpret this decision as a strong stance by the Chinese Government towards Jack Ma and his empire. We know Beijing doesn’t love the character of Mr. Ma and his speech against the Government at the end of October 2020 was seen as unacceptable. The new regulations, which have forced Ant Group to review its business model and consequently drop the listing project, state that no one is above Beijing, not even the most popular and successful entrepreneur of the country. Until the interests of Jack Ma were restricted to the mere commerce, the central government has always turned a blind eye to his countercultural ideas, but finance is another thing. Beijing doesn’t like to give up control of finance and credit extended to individuals and entrepreneurs especially if the alternative is the unclear and low regulated method proposed by Jack Ma. Indeed, as the regulators said, the questionable lending method used by Ant Group is something that needs to be examined in detail before taking such a big step and may need some regulations in order to avoid big problems in the future for the Chinese economy as already happened. Probably, in Beijing they remember the Luckin scandal happened only a few months before. The case of the innovative Chinese coffee company that after an incredible rise in just a couple of years went public on the Nasdaq in May 2019 raising $561 million supported by international investors as Credit Suisse, Morgan Stanley and BlackRock.  At the beginning of 2020, Luckin was accused of manufacturing revenues and after EY reviewed its 2019 account, they found evidence that the company faked more than $300 million in revenue, approximately a quarter of the total. This scandal has certainly further worsened the Chinese companies’ reputation among western investors and the Government might have wanted to make sure that something like this won’t happen again in the future, especially in the case of a huge company like Ant. 

It was certainly not an easy decision for the Chinese Government given the relevance of Ant Group and the public influence of its owner, but by doing so, it showed once again its undisputed power over the country by all possible means. Furthermore, the Chinese government had the courage to take a position on a problem that affects many countries in the world, concerning fintech companies relaxed regulation compared to the traditional financial service providers. Indeed, Jack Ma is probably right when he says that the Chinese financial system is too old and too regulated but, on the contrary to what he has always tried to assert, Ant Group is a true financial company and therefore it must play by the same rules of the others. Beijing, although driven by the desire to hold off a Government’s opponent such as Mr. Ma, did what many countries are trying to do in a more democratic way, equate the tech companies to the traditional ones in order to avoid unfair competition and too low regulations, which may lead to bigger problems, especially if we talk about the financial sector.

To conclude, I agree that, as many experts says, it is very unlikely that the IPO will be blocked forever, but Ant Group will have to change drastically its strategy and business model to comply with the new penalising rules. Therefore, it is crucial to see how Jack Ma will react to this attack by the Communist Party and whether there will be another IPO in the future, it will be totally different.

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