Halted China IPO sends political and policy signals
Regulators intervened at the last moment to halt the keenly awaited IPO of Alibaba’s finance spinoff, Ant Financial
Chinese regulators on November 3 halted the initial public offering (IPO) of Ant Financial, just two days before the scheduled launch. The IPO was slated to be the largest in history, valued in excess of USD30bn. The incident gives investors a striking example of immediate political risk in the current Chinese environment.
What next
China’s leadership has sent a clear signal both of its power over private businesses and of its commitment to stabilising the financial sector. The IPO probably will happen after a few months’ delay, but the valuation is likely to decrease and the firm will be subject to greater governmental control and regulation.
Subsidiary Impacts
- This episode fast-tracked the publication of new draft regulations for online lending.
- Regulatory scrutiny in the entire fintech sector will intensify.
- Ant will need to adapt its business model to a higher-regulation environment, and will probably become less profitable.
Analysis
Ant Financial, the fintech arm of the e-commerce conglomerate Alibaba, had reportedly cleared all regulatory hurdles by the end of October, paving the way for its listing on the Hong Kong stock exchange and the Shanghai Stock Exchange Science and Technology Innovation Board (the 'STAR' market), which was established last year (see CHINA: New tech board will cut reliance on US market - May 29, 2019).
It was expected the IPO would make Ant the fourth-largest financial company in the world by market capitalisation, after Berkshire Hathaway, Visa and Mastercard.
Ant was expected to become the world's fourth most valuable company
Company background
Ant Financial started out as Alipay, the digital payment service for Alibaba's e-commerce platform. It grew rapidly because China was still largely a cash economy with a large under-banked or unbanked population and relatively little use of credit and debit cards. There were no incumbents to compete with or displace.
From a simple escrow service, Alipay grew into the market leader for online payment in China, occupying 55% of the market currently, with 1.3 billion active users in China and nine countries across Asia.
In order to generate more value from these users, Ant was established as a vehicle to offer additional financial services. Since 2014, it has branched out from payments into wealth management, insurance, lending and credit scoring (see CHINA: Social credit fears will taint Sesame Credit - February 27, 2019).
This integration has turned out to be highly successful: around 80% of Ant consumers use at least three of these additional services, and 40% use all of them, resulting in profits in excess of USD2.6bn on the USD17.5bn it earned in revenues in 2019.
IPO halted
Two days before the IPO was supposed to happen, the Shanghai launch was halted after a closed-door meeting between representatives of several financial regulatory bodies, Alibaba founder Jack Ma (still a major shareholder in Ant) and several other executives. The company also halted its listing in Hong Kong. Publicly, the Shanghai Stock Exchange cited "major changes in the fintech regulatory environment" which might disqualify the firm from listing, and told Ant to disclose these changes.
New regulations
On Monday November 2, the China Banking and Insurance Regulatory Commission and the People's Bank of China released draft regulations on micro-lending. This draft includes a ban on interprovincial loans except if explicitly approved by regulators, a cap of CNY300,000 (USD45,550) on online loans to individuals, a CNY1bn registered capital threshold for online microlenders and a requirement for microlenders to provide at least 30% of any loan they fund jointly with banks.
These draft regulations are part of a broader regulatory effort to impose greater control over Ant. The company had been governed with a light touch since its creation. Central authorities did not wish to impede the development of a national champion, while Ma sometimes used his personal relationship with senior leaders to prevent regulators issuing stricter regulations.
However, maintaining stability in the financial system by slowing the growth of debt has been rising as a priority for several years. It is all the more urgent amid the COVID-19 pandemic. The leadership wants to stimulate the economy without the same rapid build-up of debt -- and commensurate rise in systemic risk -- that acommpanied its response to the global financial crisis.
Political signal
The proverbial last straw may well have been a controversial speech Ma gave at a financial industry summit in Shanghai on 24 October, referring to state-owned banks as having a "pawn shop" mentality -- ie, stuck in obsolete business models -- and criticising the Basel banking regulations as a "club for the elderly".
Ma's criticism of state banks appears to have been a costly act of poor judgement
Irritated by this attack, regulators started drawing up internal reports on how Ant had encouraged poor and young individuals to rack up debt, and on how public opinion had responded negatively to Ma's remarks. Senior political officials, including Vice Premier Liu He, instructed regulators to thoroughly review Ant's business activities. The regulatory draft, already in preparation, was fast-tracked.
Ant later released a statement echoing Communist Party jargon and policy slogans in which it committed to "implementing the meeting opinions in depth and continuing our course based on the principles of stable innovation, embrace of regulation, service to the real economy, and win-win cooperation".
Beijing's disciplining of Ant Financial is a show of force. It leaves no one in doubt about who calls the final shots, even in China's burgeoning digital economy, and at the same time sends the message that Beijing is not afraid to take bold steps to shore up financial stability.
Balancing trade-offs
Beijing needs to balance the need to maintain financial system stability with the fact that online credit is important in shoring up domestic demand, another goal of the leadership.
Ant's listing had also been an important marker of a trend for Chinese companies to list at home rather than abroad, as well as an endorsement of the new Shanghai STAR market. Ma and his companies are celebrated symbols of China's dynamic digital economy, and Alibaba is critical to realising the international ambitions of Beijing's digital strategy.
The IPO will probably go ahead after a few months -- long enough to be plausibly seen as atonement, but short enough not to impede these other interests too much -- and after the requisite expressions of repentance from Ant.
