China’s move to abruptly halt the world’s biggest stock market debut sends global investors a clear message: Any financial opening will only be done on terms that benefit President Xi Jinping and the Chinese Communist Party (CCP).
Policymakers in Beijing shocked the investment world on Tuesday by suspending an initial public offering by Ant Group Co., a fintech company owned by billionaire Jack Ma — China’s second-richest man. The decision came just two days before shares were set to trade in a listing that attracted at least $3 trillion of orders from individual investors.
The timing of the decision showed once again that for Xi and the party, financial and political stability take precedence over ceding control of the economy — especially to a private company. In Beijing’s view, allowing the IPO to go forward could effectively give Ant too much sway over the financial system, posing broader risks that could ultimately undermine the party’s grip on power.
“The party is flexing its muscle,” said Victor Shih, associate professor at UC San Diego and author of “Factions and Finance in China: Elite Conflict and Inflation.” “It’s saying to Jack Ma, you are going to have the biggest IPO in the world, but that’s not a big deal for the CCP, which oversees the world’s second-largest economy.”
While the party has ample tools to quash political dissidents, local officials have struggled at times to contain outbursts of anger brought on by bread-and-butter issues such as labor disputes, investment fraud and environmental disasters. To mitigate any threats to the financial system or the party’s authority, Xi’s government has demonstrated over the past decade that it has no problem taking down billionaires and private companies.
For foreign investors, the Ant saga has raised questions about the viability of Hong Kong and Shanghai as premium financial centers. That’s particularly so after China last week signaled greater openness in a new five-year plan that put a timeline on moving forward with past promises of allowing greater foreign access and gradually relaxing controls over the yuan and capital flows.
Both the sequence and timing of events of the IPO failure will raise doubts among foreign investors about China’s commitment to the kind of transparency needed in modern, open capital markets, said Fraser Howie, author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.”
“It sends a number of signals, often conflicting,” Howie said. “Investors must therefore be concerned about the listing process in China, they will be concerned by disclosure, they will be concerned about arbitrary moves on the part of the regulators.”
Many analysts saw the move as sensible, even if the timing was disruptive. Chinese regulators said Ant’s business model effectively allowed it to charge higher fees for transactions while state-run banks took on most of the risk. At the same time Ant sought to list, authorities were racing to develop rules that would subject financial holding companies to higher capital requirements. It’s also planning to create a digital yuan, which is part of its push to maintain control over the stability of its payment system.
The China Securities Regulatory Commission said Wednesday it supported a decision by the Shanghai Stock Exchange to block a “hasty” IPO. Changes in fintech industry regulations have a “huge impact” on Ant’s operational structure and profit model, it said in a statement.
Ma’s risky speech
At a conference in Shanghai on Oct. 24, Ma blamed global regulators for focusing too much on risk, and criticized China’s own measures for stifling innovation. The remarks came after Vice President Wang Qishan — a Xi confidante — called for a balance between financial innovation and strong regulations to prevent financial risks.
“It appeared that, intentionally or not, Ma was openly defying and criticizing the Chinese government’s approach to financial regulation,” Andrew Batson, China research director at Gavekal Research Limited., wrote in a note.
Ma’s comments came right before the Communist Party held a key meeting to plan the country’s economy for the next 15 years, bringing the issues of technology, financial stability and economic growth to the top of the national agenda. After it ended last week, regulators released new rules affecting Ant’s businesses and summoned Ma to Beijing for a rare meeting on Monday. The IPO was suspended the next day.
Within China, state-run media have highlighted Ant’s failures to comply with regulatory requirements while showcasing the government’s strong market supervision mechanisms and risk controls to protect consumers. In a commentary dated late Tuesday, the party-backed Economic Daily said suspending the IPO showed that “every link of the capital market has perfect rules and serious supervision methods.”
“It’s understandable from the regulatory perspective and it is still a better outcome for investors than facing a black-swan event immediately after the listing,” said Lv Changshun, an analyst at Beijing Zhonghe Yingtai Management Consultant Co. “Policymakers can tolerate innovation, but that should not be at the cost of a systemic financial risk. Avoiding that risk is an important foundation to push forward more capital market reforms.”
Ant’s IPO prospectus was a bigger contributor to the timing of China’s moves than Ma’s speech in Shanghai, according to Gao Zhikai, a former Chinese diplomat and former China policy adviser for the Hong Kong Securities and Futures Commission. Once regulators saw that Ant could do things that were off limits to commercial lenders, he said, “someone rang the bell and brought it to the attention of the regulators.”
“Traditional financial institutions, banks in particular, would probably welcome this decision when the dust settles,” he said. “It also does not create a regulatory disadvantage to Ant Group. It reminds Ant they need to treat certain parts of its operation as a commercial bank.”
Chinese authorities have been stepping up oversight of private companies for several years. In 2018, the central bank identified Ant and other firms as financial holding companies, putting them under increased scrutiny because of their growing role in the nation’s money flows and financial plumbing.
That same year, regulators seized Anbang Insurance Group Co., which symbolized the recent era of mega-acquisitive Chinese companies, and imprisoned its former chairman for fraud. HNA Group Co. and Tomorrow Holding Co. were later taken over by the state or broken up, while China Evergrande Group in September is to have warned of a potential cash crunch that could pose systemic risks to China.
Ostentatious and blunt, Ma is perhaps China’s most well-known entrepreneur in the nation. The globe-trotting tycoon is a special adviser to the United Nations, has debated Elon Musk on international forums and is a regulator at annual Davos gatherings. He’s created two multi-hundred-billion dollar companies and has labeled himself a champion for the little guy and small businesses.
On Wednesday, however, posts on Chinese social-media platforms were largely unsympathetic toward Ma. One anonymous Weibo poster wrote, “If you don’t go out looking for trouble, trouble won’t find you.” Another quipped that “it’s time for Jack Ma to wake up, listen often and speak less.”
Despite Ma’s public dressing down and the reputational blow to China’s markets, many investors are still optimistic about Ant’s IPO. Higher liquidity requirements would hit sentiment, but that’s not necessarily a bad thing for a listing that saw shares selling for a 50% premium in gray-market trading ahead of the IPO.
Ram Parameswaran, founder of San Francisco-based Octahedron Capital Management, a hedge fund that holds shares in Alibaba Group Holding Ltd. and is planning to invest in the Ant IPO, saw the suspension as positive to stamp the speculation in the stock. Shares of Alibaba, which owns a third of Ant, fell 7.5% in Hong Kong, the most since its debut in the city last year.
“What’s clear to me is that the lending business will grow slower over the next few years,” Parameswaran said. “That in the larger scheme of things is net positive for the sector and Ant. Steady growth is good.”
For global investors, however, the episode is likely to reinforce the notion that the party calls all the shots when it comes to major business decisions — and any opening measures will be carefully calibrated for the impact on the Communist Party. That could be all the more important in the years ahead as China seeks to develop its own core technologies in the face of growing pressure from the U.S., which is likely to continue no matter who ends up the winner of Tuesday’s election.
“This sends a signal to the major tech players not to get too big for their britches and that the party is still in charge,” said Kendra Schaefer, head of digital research at the Trivium China consultancy in Beijing. “Internationally, however, moves like this do very little to alleviate concerns that tech companies going out are not having their strings pulled by Beijing.”
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