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Who needs Donald Trump’s America?
You won’t find these words in Ant Group’s initial public offering prospectus, but they’re written between the lines in bold font as the fintech juggernaut Jack Ma built bypasses New York to list in Hong Kong and Shanghai.
In 2014, the New York Stock Exchange debut of Ma’s Alibaba Group Holding Ltd was a big coup for Beijing. Here was a homegrown tech success story pulling off history’s then-biggest IPO.
China Inc had arrived at the center of global finance – and then some.
Now, Ant’s dual listing, announced Monday, represents a big win for Xi Jinping’s Communist Party of China.
It is unclear whether President Xi is stage-managing Ma’s fintech champion behind the scenes, but the dual listing in two China-region cities is smart. In Hong Kong, Ant will enjoy strong demand from global punters with hard currencies.
In Shanghai, it will see even richer valuations on the city’s Star board.
The IPO is expected to raise US$10 billion in Hong Kong and as much as $30 billion in Shanghai. Ant’s post-IPO valuation could hit $200 billion.
A star rises
The deal will have investors finally grasping what Xi was thinking in late 2018 when he pushed to create the tech-themed bourse, which opened exactly one year ago. It has had a rocky 12 months with trading volume underwhelmed and few splashy names listed.
However, things started to change last week with Semiconductor Manufacturing International Corp’s IPO. The $7.6 billion deal was one of China’s biggest in a decade. SMIC’s price more than tripled on the first day of trading.
Yet Ant, with a market cap likely five times bigger than SMIC’s, will be the real game-changer.
That will be a big pay-off for Xi, politically.
The Star board is an ideal metaphor for how Xi, despite surging trade tensions with Washington, has been quietly raising China’s financial game by opening capital markets, boosting stock trading, cutting bureaucracy, easing curbs on the types of companies that can list and allowing shares to trade reasonably freely.
It’s a work in progress and much policy disruption lies ahead. But the roughly $30 billion raised by just over 130 Star companies in 12 months is enough to ruin Trump’s July.
That’s saying a lot considering Trump’s sliding poll numbers as Covid-19 clusters explode across the US. A roaring stock market is Trump’s go-to argument for re-election on November 3 and he has been hyping the Nasdaq as the only place for tech firms to be.
Trump’s challenge now is to spin what could be the biggest IPO in world history while he’s coloring China as a basket case.
Clearly, Xi could use some decent international headlines following his disastrous Hong Kong clampdown. The win is China Inc proving it can pull off a monster share sale without turning to New York, as Alibaba and Baidu did in the past.
Trump won’t be telling his supporters that Ant, by some projections, could soon be worth more than Goldman Sachs and Wells Fargo combined. Or that China’s economy has been returning to growth since the second quarter as the US sheds millions of jobs.
Defying communist gravity
That Hangzhou-based Ant is listing at all speaks to Beijing’s ambitions. For a time, regulators dragged their feet on the IPO request, worried Ant’s scale would make life harder for state-owned enterprises.
The Alipay app, after all, boasts more than 900 million enthusiastic followers who use it for payments, loans, insurance, wealth management, groceries – you name it.
It also represents a difficult balancing act for Xi’s party.
On the one hand Ant, 33%-owned by Alibaba, is “Exhibit A” for how China’s new economy could transform the online services and payments sector. On the other, the efficiency and scale of its assault on a state sector which has enabled many Communist Party bigwigs to line their pockets requires some deft management.
But the same goes for Silicon Valley as Ma’s juggernaut steals its thunder.
Xi’s party has a well-earned reputation for suspicion and, often open hostility toward ambitious capitalists. Now, China’s top entrepreneur is once again showing it’s possible for a scrappy and disruptive private enterprise to thrive under the party’s heavy thumb.
The reason the IPO news is so “positive to the market” is that it is a chance to “unlock the value” of a fintech giant “with three pillars in digital payment and finance, globalization and technology services,” says analyst Thomas Chong of research firm Jefferies.
This, he says, finds Ant “at the sweet spot of a recovery story backed by strong technological strengths.”
In a statement this week, Ant said the IPO “will help the company accelerate its goal of digitizing the service industry in China and driving domestic demand, as well as position the company to develop global markets with partners and expand investment in technology and innovation.”
As such, the valuation could swell to $210 billion, says analyst David Dai at Sanford C. Bernstein. The “earnings power of the company has improved,” he says, relative to earlier projections.
China needs more of this.
The model Ma created did more than make him the toast of the Davos set. It inspired new generations of wannabe innovators playing right into Xi’s “Made in China 2025” gambit to dominate tech.
Ma created a lane for others to navigate the vagaries of an opaque, top-down system to launch a new wave of startups. That’s vital to disrupting an economy set to eclipse America’s.
Trump’s trade wars backfire
Posterity is sure to assign Trump considerable blame for this passing-of-the-baton dynamic. Yes, China was destined to surpass the US, just as it did Japan, during President Barack Obama’s day.
But the Trump era has been all trade clashes and bluster. He’s built virtually zero economic muscle at home.
Essentially, Trump has a 1985 problem on his hands. Thirty-five years ago, punitive tariffs and brawls over currency rates was the way things were done. Back then, when Trump was cutting his teeth as a New York developer, America’s big foe was Japan Inc.
In a 1989 interview, Trump complained that Tokyo’s industrial policies had “systematically sucked the blood out of America” and its manufacturing capabilities. “They have gotten away with murder,” Trump said, using language Xi’s government has come to know well.
“They have ended up winning the war.”
Decades later, Trump says it’s China that’s “raping” American living standards. In November 2015, he started his run for the presidency charging that the Chinese “want to take your throat out, they want to cut you apart.”
That bombast smacked of déjà vu to long-time Japan watchers. In May 2016, he accused Beijing of the “greatest theft in the history of the world.” He’s since taken to Twitter to rail against “STUPID TRADE” with a China he argues is “playing the currency devaluation game.”
Ma, though, is an intriguing microcosm of the global business elite’s effort to navigate a uniquely transactional US leader. In January 2017, 10 days before Trump was sworn in, Ma swung by Trump Tower in New York.
There, Ma pledged to help one million small American businesses to harness his platform to sell to Chinese consumers over the next five years.
To Ma, says Duncan Clark, author of The House That Jack Ma Built, it was “important, given the anti-China rhetoric that has been coming out, to inoculate the company and himself from that.”
Less than two years later, though, Ma thought better of those plans after Trump started a global trade war. As Ma told Chinese state media in September 2018: “The promise was made on the premise of friendly US-China partnership and rational trade relations. That premise no longer exists today, so our promise cannot be fulfilled.”
Trump’s domestic policies have done little to deserve Ma’s billions anyway. Though the drop in corporate taxes since 2017 is a clear selling point, Trump’s economic strategy has largely been going mano-a-mano with Xi.
Again that is a strategy that might’ve reaped big benefits in 1985. It does zero, however, to increase American innovation, boost productivity, improve infrastructure, revamp a flagging education system, narrow income inequality or prepare for the automation and artificial intelligence waves to come.
Trump’s immigration crackdown is making it harder for Silicon Valley to attract top programmers and the next wave of “unicorn” founders.
His prodding Detroit to reduce fuel-efficiency standards is a godsend to Nissan, Hyundai and China’s SAIC Motor, Changan Automotive and Greely International. Trump’s strange affinity for coal is quite a contrast to China’s massive investments in renewable energies and electric vehicles.
China’s market upgrade
Meanwhile, Xi has been quietly altering the casino-like atmosphere that has long plagued Chinese shares. This is critical.
To many, the huge rally in mainland shares as Covid-19 risks abound is too reminiscent of summer 2015, when the Shanghai market boomed and busted, for comfort. Hence this July 22 New York Times headline: “It’s just like gambling: China’s bustling stock market echoes the 2015 crisis.”
Clearly, arguments can be made that mainland froth is racing ahead of economic fundamentals. Yet it’s also true that Xi’s reforms may be reducing the amplitude of volatility that spooked global markets.
Xi’s steps include rolling out a series of new stock-index futures contracts and letting a number of China’s biggest banks trade bond futures. The idea is to increase transparency and hedging tools. Regulators are working on perfecting same-day settlement of trades and mechanisms to short stocks.
The Shanghai Stock Index, meantime, is recalibrating China’s key benchmark and is expected to add more private sector companies. The step will, in theory, channel more investment into the private sector rather than into SOEs.
These changes and more may soon arrive at Shenzhen’s ChiNext board, meaning Xi’s reforms would broaden to the entire $9.3 trillion mainland market.
Ironically, Trump deserves credit for inadvertently prodding Xi’s urgency. Xi acceleration of reform has coincided with the trade war. The trade war fallout has increased pressure to internationalize China’s capital markets and to adopt more efficient ways for small-to-midsize companies – where the next unicorns are – to raise funds.
The turmoil Trump wrought is increasing incentives for Chinese players to list at home to protect their companies.
In years past, mainland entrepreneurs flocked to New York’s higher valuations, buzz and bragging rights. Now many are willing to leave money on the table in an act of self-defense, as the Trump versus Xi war spins out of control.
US lawmakers, for example, recently passed legislation that could block mainland companies from going public in New York. The tit-for-tat has Trump closing Beijing’s consulate in Houston and China shuttering Washington’s in Chengdu.
And sanctions related to Xi’s Hong Kong crackdown are another wildcard for markets.
Hong Kong vs Shanghai
For Hong Kong, Ant’s IPO is ideally timed. Charles Li, the outgoing head of the city’s exchange, said it restores faith in Hong Kong’s “role as the world’s leading international IPO market.”
Not to be outdone, Shanghai officials said Ant proved the Star board is the “first choice” for tech players.
One can debate who’s right. With Tencent, more than 2,000 listed companies and a market cap equivalent to Japan’s economy, Hong Kong Exchange officials make a great point. Nor does Hong Kong suffer from Beijing’s capital controls, meaning the city is still the logical choice for greater-China-region companies to interface with global punters.
The Ant extravaganza, notes analyst Michael Wu at Morningstar, “is going to increase the attractiveness of listing on HKEX.”
Yet a side effect of China tightening the noose around Hong Kong’s autonomy is Shanghai and Shenzhen being able to compete for IPOs as never before. The presence of SMIC and soon Ant augur well for the mainland’s financial hub dreams.
At the very least, Ant is adding fuel to a growing Hong Kong-Shanghai rivalry.
This, too, is good news for Xi if this competition has both financial centers raising their games.
The Ant deal also serves as a reminder that China appears to be emerging from the Covid-19 crisis as Trump’s America faces soaring infection rates. This makes it “an opportune time for Ant and Alibaba to put the pedal to the metal and gain global presence and share,” notes analyst Thad Peterson at Aite Group.
For China to join the ranks of industrialized nations in something other than scale, its markets need more institutional investors and leading companies like Ant. To enable this, China Inc needs to create more wealth and run fewer casinos.
The more you see giant, game-changers bypass New York and play at home, the more Shanghai proves it’s ready for global prime time.
Meanwhile, ever more Americans will suffer buyer’s remorse for betting that a reality-show host could stop China in its tracks.