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The initial public offering (IPO) of Ant Group, originally scheduled for Nov. 6, was much, much more than the coming-out party of a successful finance operation. The $37 billion offering would have been the world’s largest and conferred a value of $316 billion on the Chinese financial giant. Listing in Hong Kong and Shanghai would show the world that Chinese companies had no need to go to New York to access capital; that the besieged special administrative region of Hong Kong remained a force to be reckoned with in international finance; and that China could produce corporate giants that mastered 21st century technologies.

With all that in the balance, Chinese authorities still pulled the plug on the IPO just two days before the scheduled event. Earlier that week, China’s financial watchdogs published draft rules that significantly changed the regulatory environment, which in turn prompted suspension of the IPO. While that was the official explanation for the move, the decision was in fact an assertion of power and a reminder to Chinese business professionals that their government and not entrepreneurs — no matter how successful — are in charge.

By virtually all accounts, the draft regulations were released in response to a late October speech by Jack Ma, founder of Alibaba (which evolved into the Ant Group), in which he charged the main actors in China’s financial system were neglecting the poor and most needy. He blasted China’s banks, most of which are state-owned, for having “a pawnshop mentality,” in which borrowers relied too heavily on collateral and other guarantees. Financial authorities used “yesterday’s methods to regulate the future.” As a result, growth was stunted because innovation was stifled. Ma was blunt: “Many of the world’s problems,” he said, were a result of “only talking about risk control, not talking about development, not thinking about young people’s or developing countries’ opportunities.”

Ant sought to meet that need, matching borrowers with lenders who would provide small loans (sometimes called micro-lending), taking a small percentage of the loan from partner banks. (The name “Ant” was intended to signal a desire to serve the forgotten “little guy”) Ant insists it is a facilitator, not a lender; a technology company (“techfin”), not a financial institution (“fintech”).

Whatever sympathy regulators may have had for Ma’s position dissipated after his October speech. Stung — the remarks were reportedly characterized by senior officials as “a punch in the face” — they released new regulations that require online micro-lending platforms to provide 30% of the funding of “joint loans” (an undefined term) that are offered through their platforms. Currently, Ant funds only 2% of the 1.7 trillion yuan ($256.9 billion) in consumer loans it has out. That huge increase would severely limit Ant’s business prospects and forced suspension of the IPO.

The Chinese government is right to worry about the stability of its financial system. Ant’s leverage is staggering and it is not the only Chinese company with that exposure. According to one estimate, 13% of the country’s financial institutions can be considered “high risk.” The Western world knows well the price of complacency and indifferent rule-making in the financial sector: The Great Recession was the result.

Chinese President Xi Jinping rightly identified financial security as a national security concern in 2017. Earlier this month, the Peoples’ Bank of China, the country’s central bank, released its “China Financial Stability Report,” and underscored the risks involved and the need for a more comprehensive and coherent regulatory framework.

But the argument that the new regulations were a reminder of the authority of the Chinese government is reinforced by other developments. In September, the General Office of the Central Committee of the Chinese Communist Party called for efforts to “guide” private enterprises to “improve their corporate governance structure and explore the establishment of a modern enterprise system with Chinese characteristics” — in other words, to increase party influence in private companies and better direct the private sector toward government objectives.

In November, the Central Commission for Comprehensive Reforms, an agency headed by President Xi Jinping, called for state-owned enterprises to be “stronger, better and bigger” so that they could play a more effective role in the national economy. And earlier this week, the State Administration for Market Regulation released guidelines that for the first time define anti-competition practices among internet companies, effectively setting limits on what has become a market of behemoths. All these moves strengthen state power over the private sector.

Ant may yet issue its IPO. The draft regulations will have to be finalized, however, and the company must then ensure its compliance with those rules. The first step alone could take as long as a year. During that time, Ma, along with other Chinese entrepreneurs and anyone that wants to do business in China, will have time to think about their prospects — and their limits.

The Japan Times Editorial Board

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