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The heady run-up to the IPO might explain Jack Ma’s outspokenness in Shanghai. (Photo: AFP)
The heady run-up to the IPO might explain Jack Ma’s outspokenness in Shanghai. (Photo: AFP)

How Jack Ma blew Ant’s $35-billion IPO

  • The story of how the charismatic e-commerce icon forgot the basic rules of doing business in China
  • For some years now, there have been discussions between Ant and China’s regulators seeking to understand its financial model and the algorithms. Ant would not reveal much

BENGALURU : The drama of business plays out behind closed doors, so it is usually difficult to discern when a business that soared like a comet for years is about to come crashing down to earth. Ant Group’s controlling shareholder Jack Ma’s controversial speech last month in Shanghai before such luminaries as Wang Qishan, China’s vice-president, the previous and current governors of the People’s Bank of China, is an epic exception.

As a stage to drive home Ma’s argument that the regulatory constraints on fintech firms such as Ant were from a bygone era, the Bund Finance Summit was hard to beat. His criticisms appeared directed at the Basel III regulations that dramatically raised capital adequacy ratios for financial institutions relative to their risk-weighted assets. The regulations were brought in worldwide after the global financial crisis in 2008, but Ma painted the Basel accord as “a seniors’ club" from the age of the Industrial Revolution.

Dressed in a grey suit and blue tie, the small-built 56-year-old founder of Alibaba then turned his attack squarely onto Chinese regulators, many sitting in the audience, when he said that the systemic risk in China was that it lacked a proper financial system. He denounced Chinese banking, which relies heavily on sizeable collateral before loans are sanctioned, as having a “pawnshop mentality" that stifles entrepreneurialism.

As a gigantic non-banking financial company, Ant uses artificial intelligence and big data honed at Alibaba, the e-commerce giant that Ma founded which through its affiliates owns a third of Ant, to determine the creditworthiness of borrowers.

With Ant’s initial public offering in excess of $35 billion, which would have been the world’s largest, just days away, Ma was taking his fight with regulators public. It proved a disastrous miscalculation, in part because in China too there is a backlash within the government against tech companies.

Had the listing gone ahead, it would have valued Ant Group in excess of $300 billion. Alibaba, which has a dual listing in New York and Hong Kong, has a market cap of about $700 billion. The two companies are large investors in Indian companies such as Paytm and Zomato. Last week, The Wall Street Journal reported that the decision to delay the listing was made by President Xi Jinping.

The debacle for Ant and Ma tells a larger story about China. Financial risk is a top concern for the country’s economic leadership and Xi. China may be one of the most freewheeling capitalist countries on earth, but under Xi it frequently cuts its biggest businessmen down to size while favouring state-owned enterprises. State-owned banks have long been critics of Ant.

In India, finance minister Nirmala Sitharaman’s recent exhortation to banks to promote RuPay as well as the National Payments Corporation of India’s cap on digital transactions through third-party apps such as Google Pay shows a similar favouritism. Unlike in India, however, China under Xi is hypersensitive to oligopolies and monopolies of powerful businessmen. Indeed, the projected $1-trillion combined valuation of Alibaba and Ant was likely a factor in the punishment meted out to Ma.

The tightening noose

Within a week of the speech in Shanghai, Ma and the top managers of Ant had been given a dressing down by the regulators, which coincided with new regulations governing micro-lending. Ant then informed the Shanghai Stock Exchange that it would not be proceeding with its IPO.

The speech by Ma was clearly a proximate cause for the listing being pulled but as Eswar Prasad, a professor of trade policy at Cornell, points out, “Chinese regulators have long had concerns about the opacity of Ant’s operations and the oversize influence it has on the Chinese financial landscape. This action must be seen in the light of vice-premier Liu He’s recent emphasis on promoting stable financial market development as a key foundational element for China’s sustainable growth."

Beijing is all too aware that unchecked financial risk-taking led to the global financial crisis. It has had its own peer-to-peer lending crisis over the past few years, with many firms operating Ponzi schemes. This has led to a crackdown by Beijing under the wary eye of the powerful Liu, also a trusted lieutenant for President Xi in trade negotiations with the US, and the head of the China Banking and Insurance Regulatory Commission, Guo Shuqing.

While the world obsesses about Sino-US relations, scandals such as P2P lending and China’s huge debt to GDP ratio of 350% are correctly seen by Beijing as China’s greatest vulnerability. This month, an association of institutional investors said it was launching a “self-disciplinary" investigation into a large coal company, which defaulted less than a month after issuing a new bond.

China’s policymaking can seem opaque and often is, but a public consultation had been going on for months ahead of a new law governing fintech firms that would amount to a new accounting order for companies such as Ant, requiring them to behave more like banks in taking on more loans onto their own balance sheet rather than the paltry 2% or so it currently does.

The new regulations will also force fintech companies to set aside much larger capital reserves than in the past. “Jack Ma must have known something big was coming down the track," said James Kynge, author of China Shakes the World and the Financial Times’ global China editor. Ma’s speech in late October may have been peppered with ill-chosen words but was also possibly a desperate last-minute plea.

“Jack has never been one for a quick win. He always has 2030 and 2040 in his mind," said Sanjay Varma, who was a director of business development at Alibaba between 1999 and 2002 and worked with Ma and Joseph Tsai, the executive vice-chairman of Alibaba. Varma, now CEO of Kalido, a professional networking app, recalls the birth of what would become Alipay when Alibaba started using escrow to facilitate transactions back in the early 2000s, circumventing cumbersome letters of credit.

More than 80 million merchants use Alipay for business over the course of a month. Now under Ant, it enables individuals and businesses to send and receive payments online. For more than a decade, the company has used QR codes to pole-vault digital transactions in China to a science-fiction level well ahead of developed world countries. Alipay has a billion active users and processed $17 trillion worth of transactions in mainland China over the past year.

The reading of the bitter tea leaves left behind by Ant’s aborted listing will continue for months. “Was (Ma’s speech) about banking regulation, or two colliding visions of China – or both," asked an analysis on Tortoise Media, an online news portal last week.

Kynge says Ma could not have picked an audience more likely to react to his harsh words: “He’s criticising financial regulations to the guys who have been making them for 30 years."

The heady run-up to the IPO could have prompted a moment of hubris. After all, Ma and Ant were being lauded by excited institutional investors and fawning investment bankers alike; the listing was expected to generate $400 million in fees for global investment banks. Kynge uses the Chinese phrase pai ma pi, literally to pat a horse’s buttock but a metaphor for heaping praise on someone. This flattery might explain Ma’s outspokenness in Shanghai.

The back story

I interviewed Ma almost two decades ago when Alibaba was still in its infancy and was struck by his unflappable confidence and ability to turn a phrase, a gift he may have picked up during an impoverished childhood from parents who made a living as musicians and story-tellers. Ma failed his university exams and jokes often about being rejected for a job by Kentucky Fried Chicken. He became a well-liked English teacher instead.

He told me that e-commerce was a “marathon"; the US e-commerce giants had merely won “the first 100 meters". I was impressed but also incredulous. Ma has made good on that boast: in 2014, the $25-bn listing of Alibaba would be the largest in the world. By then, the company had become synonymous for a portal that connected China’s wealth of producers for just about everything to buyers within China and around the world. Last year, Ant processed payments worth $17 trillion, 25 times as much as PayPal, its US equivalent.

The recent turn of events is all the more surprising because Ma “retired" in September 2019 from running Alibaba day-to-day, largely as a show of deference because Beijing appeared to be concerned that many of its billionaires were too influential. In the past couple of years, China’s largest property company has been discouraged from investing overseas in a big. Financial company Anbang Insurance was formally liquidated in September this year after a restructuring.

Voice of America said of Ma’s ‘retirement’ that “It is still too early to tell if the world’s largest e-commerce giant and its charismatic founder have steered away from the clutches of the Communist Party, which seemingly views large private companies as a threat."

But by scuttling the massive listing two days before it debuted on the market in Shanghai and Hong Kong, Beijing has lost face as well. Kynge argues that the regulators “acted far too late."

For some years there have been discussions between Ant and China’s regulators seeking to understand its financial model and the algorithms by which it assessed creditworthiness. Ant reportedly would not reveal much, in part because it worried its algorithms would be shared with favoured banks. As one state banker told the Financial Times recently, “If I don’t understand you and can’t control you, I won’t let you grow."

The new draft regulations will force fintech companies such as Ant to fund close to a third of its loans. This could make it more like a boring bank than a new age fintech company. Last week, a private equity investor told CNBC that the new regulations could reduce the value of the company by half to $150 billion.

A Hong Kong-based banker familiar with the Ant listing is much more optimistic. “I don’t foresee anything that could change the scale of the listing," he said. “The multiple (determining valuation of the company) will be lower, but the problem is the system is so opaque, what the regulators want is still unclear."

The wild card is whether, as The Wall Street Journal reported last week, President Xi was actually “furious" about Ma’s audacious speech -- or merely signed off on the decision to halt the IPO so that prudent regulations could first be put in place. If President Xi saw the speech as an attack on a trusted lieutenant such as Liu He, however, the road ahead for Ant will be much, much rockier.

The damage would then spread to Alibaba. Significantly, on November 10, China released a draft of antitrust rules aimed at preventing digital platforms such as Alibaba from using their dominance to bully sellers into exclusivity contracts. As for Ant, few expect the listing to be resurrected before the second half of 2021.

Last week, Bill Bishop, a Sinologist who publishes a newsletter, wrote, “There are a lot of powerful interests who were going to profit from the IPO. They cannot be happy that the central government quashed it, but what are they going to do? Risk prevention is a core part of political security -- as is proper obeisance to (Communist) Party policy."

It still seems incredible that Ma, famously a former teacher, momentarily forgot the basic lesson of doing business in China: Confucius never said it of course but submission to the Communist Party is a sacred duty.

Rahul Jacob was the Financial Times’s south China correspondent (2010-13)

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