Jack Ma, the founder of Alibaba, is fond of dreaming big. As his company prepared for the 2004 launch of Alipay — which was then a clunky online payments service for ecommerce — he told colleagues that “someday it has the possibility to become China’s largest bank”, according to Porter Erisman, author of the 2015 Alibaba’s World.
This week, that dream was almost realised — until Beijing decided otherwise. It jumped in at the eleventh hour to suspend the stock market listing of Ant Group, which is Alipay’s direct successor. Before the suspension, investors had valued Ant at $316bn — eclipsing not only the valuations of China’s biggest banks but also those of the US.
So why did Beijing take such a drastic step?
From several perspectives the suspension of a $37bn share offering — the largest in history — appears to be an own goal for China. Ant’s debut was due to mark the crowning glory of a homegrown financial technology — or fintech — champion. It was also expected to shore up confidence in Hong Kong after Beijing’s imposition of a new security regime this year. Its listing in Shanghai and Hong Kong was intended to show that China no longer needs US capital markets to finance its world-class corporations.
Ant’s significance was also set to be geopolitical. The company’s IPO reinforced a broader narrative of China as a technological superpower seizing the global initiative from the US — a symbol of Beijing’s resilience to the pressure heaped upon it by the administration of Donald Trump.
With the stakes so high, it took a lot for Beijing to pull the plug. Mr Ma and other senior executives were called in by the regulators for a dressing down on Monday. But the motivations of China’s leaders in scuppering the IPO derive mostly from calculations of political power and status, Chinese analysts and state bankers say.
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 deemed unacceptable, they add.
“The Communist party is pushing back,” says Duncan Clark, author of the 2016 book Alibaba: The House that Jack Ma Built. “It is showing its disinclination to allow entrepreneurs out of their lane.
“Commerce is one thing. Finance is clearly another. Jack has embraced the power of the internet to supercharge the private sector but applying this chemistry to the financial sector is on another level it seems,” he adds.
An examination of Mr Ma’s specific transgression — and the context in which it was uttered — 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 US intensifies. Financial stability — which officials say was the objective behind the Ant rebuke — has been a keynote policy of Xi Jinping, China’s leader, since he identified it as a matter of national security in 2017.
Mr Ma’s offending words were delivered in a speech to a high-level forum on October 24. He criticised China’s regulators and accused its banks, most of which are state-owned, of having a “pawnshop mentality” that requires collateral and guarantees to extend credit. What the world’s second-largest economy really needs, he argued, is bold new players that can extend credit to the collateral-poor. He went on to claim that innovative companies and individuals are often shunned by China’s big financial groups.
These were not academic opinions. What few people realised at the time was that Mr Ma was already in private talks with regulators who were drafting new rules to bring China’s booming fintech industry to heel, according to several people with knowledge of the situation.
However, Ant Group denies that any talks took place. “The claim is baseless and is pure fabrication. Ant Group has made full disclosure of the material risks of our business in the prospectus,” it said.
One significant area of contention in the rules is the amount of capital that fintech companies would be expected to hold in reserve on their balance sheets to secure the loans they hand out. Oliver Rui, finance professor at China Europe International Business School, says that Ant could previously leverage Rmb3bn ($449m) in capital into Rmb300bn in loans. But under the new guidelines, online lenders would need to keep at least 30 per cent of capital on their balance sheets.
“What this means for Ant is that it might have to find an extra $20bn or so in capital reserves to back its current loan portfolio,” says one Chinese finance professional, who asked to remain anonymous. “If you think that the IPO was supposed to raise about $37bn, that is a really big amount of money. No wonder Ma was so agitated.”
The regulators strike
The issue is critical to the sustainability of Ant’s business model which has already disrupted China’s state-dominated financial system. Although it started life as a payments company, the privately owned fintech group has in recent years branched out into several other lucrative areas previously dominated by state-owned financial groups such as ICBC and the China Construction Bank. The lion’s share of its revenues now come from a lending business under which it has extended Rmb1.8tn in small loans to some 500m customers.
But the draft regulations, by themselves, do not explain why the IPO was suspended. In normal cases, Beijing’s regulators consult with key industry players and, when a consensus is reached, announce the new rules, Chinese bankers say. That way the market impact is minimised.
This time, Mr Ma’s intervention changed everything.
“The speech by Jack Ma in Shanghai suggests he wanted to openly challenge the regulator which is unacceptable,” says one senior executive at a major state-owned Chinese bank. “That prompted the regulator to go ahead and 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, echoes this interpretation of events. “The regulators approved the IPO on the domestic A-share and Hong Kong markets before Jack Ma’s speech,” he says. “The fintech clean-up considerations would not have been an issue [for the authorities]. But everything changed after the speech . . . Xinhua News agency publicly attacked Ma.
“The suspension and other actions have to be a result of Ma’s speech,” he adds.
Regulators have also been concerned over Ant’s control of its customer data. Guo Wuping, a senior official at the People’s Bank of China, lashed out in the official media this week at “fintech companies abusing their hegemonic position”. He added that such companies should be using people’s data to benefit the people, rather than use it to further the interests of their companies.
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 the capital markets and to protect investors’ interests”.
What next for Ant?
The most immediate question raised by Ant’s suspension is where does all this leave a company that was, until Tuesday, indisputably the leading light of China’s technology start-up sector?
Several analysts say that it is unlikely that the IPO will be permanently mothballed, given the company’s star quality and the international expectation that its share offering had generated. A more likely scenario, they say, is that Mr Ma and the company’s other senior executives would be brought back into line and obliged to make public statements displaying a measure of contrition.
But given that the final regulations on fintech are still to be officially released, it may take several months before Ant can alter its business model to come into compliance with them. And when that is achieved — and funds allocated to boost its capital base — the company’s profit margins may be whittled back. The result is that any IPO, and future valuation, are likely to look very different.
“Ant’s regulatory risk is being highlighted,” says Brock Silvers, CIO of Kaiyuan Capital, an investment fund. “Financial authorities could impact the growth trajectory of Ant’s domestic credit business but are nonetheless unlikely to quickly and significantly harm the company’s prospects.”
More broadly, the saga of Ant’s IPO carries lessons both for investors who have embraced the opportunity that China presents and for others who seek to understand the changing nature of a rising superpower.
“Right now if a businessman makes money and keeps his head down and lays low, then it is fine,” says Prof Chen. “Otherwise, it is no good. Jack Ma stuck out his head a little too far. Hence, the consequences.”
Xi backs the state
Such an interpretation fits with China’s emerging zeitgeist. As rivalry with the US intensified over the past few years, Mr Xi has shown an ever greater emphasis on boosting Communist party power in state and state-owned enterprises — often at the expense of the private sector.
Already in November, an agency led by the president issued a clarion call to make state-owned enterprises “stronger, better and bigger”. This adjustment was aimed at serving national strategic goals and adapting to high-quality growth, according to an official statement released through the Xinhua news agency.
The private sector, meanwhile, is getting a different set of marching orders. In September, the Communist party issued a call for better ideological education for people who work in the private sector, stronger party building efforts in private companies and greater participation by private firms 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 on everything.”
The culture clash that this heralds does not bode well for plain-speaking entrepreneurs such as Mr Ma or companies like Ant, which since their inception have made their money and reputations by shaking up China’s state-dominated economic order.
Even Ant’s name, which was adopted in 2014 to show that the company wished to serve “the little guy”, attests to a heritage that may be falling out of favour. In a country where traditional banks are often bureaucratic, Ant offered an easy way for anyone with a mobile phone to pay for things and invest their savings without having to visit the bank.
The company dominates mobile payments in China through its Alipay app, which unites over 700m monthly active users with some 80m merchants and handled some $17tn in payments in its last financial year — about 24 times the volumes recorded by PayPal, the US payments giant.
“The Ant IPO was full of symbolism,” says Jeffrey Towson, a professor at the Peking University Guanghua School of Management. “It was the world’s largest IPO. It was only going public in China. It was highly innovative, with no peer in the west. And it was suspended days before launch.”
Additional reporting Hudson Lockett and Primrose Riordan in Hong Kong and Ryan McMorrow in Beijing