As what may be history’s biggest initial public offering looms, the US president has aimed his crosshairs at Jack Ma’s Ant Group. The timing of Donald Trump mulling restrictions on Ant’s Alipay and other Chinese digital payment platforms like Tencent Holdings is no coincidence.
It is aimed at disrupting a dual Hong Kong-Shanghai listing that is pulling attention – and capital – away from Wall Street. It also suggests Trump’s “October Surprise” ahead of the November 3 election may be coaxing China into an even bigger trade war that he can spin for political gain.
Who’s not distracted? Investors.
Trump’s antics don’t seem to be having the intended effect as Ant valuations hold their own. Perhaps punters are concluding it’s the Covid-19 talking. Or that when it comes to China, Trump’s Twitter bark is much worse than the bite of his chaotic government.
And even if Trump pounces, says analyst Supun Walpola of LightStream Research, “there is a lot more growth left for Ant in China.”
Nor is Singapore quaking. As Bloomberg reported this week, the Southeast Asian powerhouse’s sovereign wealth fund GIC Pte plans to plow more than US$1 billion into Ant’s IPO.
Singaporean state investor Temasek Holdings Pte also appears keen on partaking in a listing that could raise as much as $35 billion.
This would be a highly symbolic bet on a couple of levels.
One, buttoned-down Singapore is not known for a high appetite for risk. That suggests managers entrusted to deploy Singapore’s state wealth have confidence in the financial giant Ma built.
Two, it’s a tacit reminder that the death-of-Hong-Kong narrative coursing through Asia in recent months lacks nuance.
The question, of course, is whether Japan’s Government Pension Investment Fund, Seoul’s Korea Investment Corporation or other Asian whales will follow suit. They’re not talking, but odds are, investors say, that a fear-of-missing-out dynamic will have sovereign wealth funds everywhere buying in.
Speaking of missing out: Trump’s beloved New York Stock Exchange can do little more than look on with envy as the greater China region steals America’s thunder.
For all his cheerleading and for all the Federal Reserve’s dollar printing, the real action is in Northeast Asia as China and its economy recovers from Covid-19. The US, by the sharpest of contrasts, is careening toward 8 million infections.
One reason for this disconnect is that the Trump White House is trapped in a 1985 mindset.
Back then, when Japan played the villain in Trump’s worldview that China plays today, blunt instruments like tariffs and policy bans might have pulled jobs America’s way.
In 2020, it does zero to build economic muscle in Trump’s economy. That’s an own-goal at a moment when President Xi Jinping’s government is investing trillions of dollars in dominating the tech world by 2025 and beyond.
Ant is emblematic of that East-West divide. The IPO speaks to the shifting balance of financial power and the ways in which private enterprise is outshining the state sector. Much to the chagrin of White House talking points, this – possibly the biggest IPO ever – is all China Inc’s.
On the one hand, the IPO offers Hong Kong a much-needed confidence and capital boost. Ant could have just listed in Shanghai, putting all its proverbial eggs in the tech-focused STAR board basket.
Instead, an IPO that will top Saudi Aramco’s will be a dual listing that buttresses Hong Kong’s status. That’s working out for Ant, too.
Interest in the shares is so great that it has the luxury of shunning the city’s tradition of securing cornerstone investors to ensure success. Ant has the further luxury of controlling how it allocates shares to investors in Hong Kong it views as strategic.
It also has latitude to lock in mainland institutional investors to keep things from going awry in the notoriously volatile A-share market.
Alipay vs global banking
True, Trump’s determination to give Alipay the Huawei Technologies treatment complicates the listing. Just as with Huawei, Trump’s team is alleging Ant’s digital payment platforms threaten US national security.
More likely is that Trump is concerned Ant threatens the global banking advantage the US has long taken for granted.
Team Trump is not alone. US hedge fund manager Kyle Bass of Hayman Capital argues Ant and Tencent are “clear and present dangers to US national security that now threaten us more than any other issue.”
Bass estimates that the Chinese Communist Party is pushing its yuan digital payment system on an estimated 62% of the world’s population in ways that threaten Washington’s influence.
Perhaps it is. But what is Washington’s plan to match China Inc’s digital ambitions?
Other than reactive sanctions, there doesn’t seem to be one.
This leaves Ma’s Ant with a narrower window to pull off the listing before Trump’s government can do its worst. The green light Ant needs from the Hong Kong Exchange is still working its way through the bourse’s approval matrix. The closer this process gets to November 3, the more volatility punters should expect.
For now, Ant’s team can hope Joe Biden wins the White House, for a second Trump term could the same as term #1 – but more so. Conceivably, Trump could pressure US allies to follow Washington’s lead in curbing Ant’s expansion.
Meanwhile, Singapore’s gambit is sure to spawn copycats among the 10 Association of Southeast Asian Nation members.
Both GIC and Temasek participated in Ant’s 2018 funding round, back when Ant was valued at about $150 billion. Might wealth managers in Jakarta, Kuala Lumpur, Manila and elsewhere place bets on future IPOs, be they Hong Kong listings or dual splits with Shanghai? It seems a no-brainer.
Add Northeast Asia to the mix, too. Even if Trump loses the November 3 election, the US political system is proving to be an unreliable steward of the US economy. For all Xi’s bluster and opacity, there’s little debate about the cash coursing China’s way.
Ask SoftBank founder Masayoshi Son, who did more than arguably anyone to scout Ma’s talent. Back in 2000, Ma was a little-known English teacher in the then-industrial backwater city of Hangzhou.
The $20 million Son handed Ma was worth some $50 billion in 2014 when Alibaba Group Holding went public in New York.
Over the last year, Son has been selling Alibaba shares to plug leaks in SoftBank’s balance sheet – more than $8 billion of late. Yet Son is almost certain to grab a taste of Ant’s IPO at a moment when his $100 billion Vision Fund needs a big win.
The listing will mint Alipay as a bona fide “super app” that has Tencent’s WeChat looking over its shoulder. Alipay’s ambitions, after all, are boundless.
What started as a mere online payment service has since veered sharply into a financial services juggernaut. It’s becoming a powerhouse in loans, insurance policies, mutual funds, travel booking and all the cross-platform synergies for sales and economies of scale.
Not exactly a new strategy, says analyst Guannan Lu of Forrester Research, “but Ant Group has made strong progress.”
Enough progress to make you wonder about the future of conventional banking in Asia’s biggest economy. At what point do banks take on a mere middleman role in the greater China region that can be avoided by households and small-to-midsize enterprises?
Get your exclamation marks ready: Alipay has more than 700 million mainland users! And, according to Analysys International, 55% of the mainland mobile payment market!
Ant’s digital financial technology platform generated more than 63% of revenues in the first half of 2020. That’s up from less than 45% at the end of 2017. In the first six months of 2020, Ant’s net profit margin was 30%, reflecting overall earnings of $3.2 billion.
Ant, of course, remains strongly enmeshed with Alibaba’s dominant e-commerce operations.
At the moment, well over 90% of Alipay users are using the app for more than just payments. This is “effectively creating a closed-loop ecosystem where there is no need for money to leave the wallet ecosystem,” says analyst Harshita Rawat of Bernstein Research.
Rawat notes that Ant has “used its payment service as a user acquisition engine for building broader financial services features.” That includes finding ways to cross-pollinate Ant’s ambitions to be China’s financial services mall and Alibaba’s dominant online bazaar.
As such, Alibaba has a direct interest in Ant enjoying a strong listing. Alibaba has a 33% equity stake in Ant. It has, as analyst Kelvin Ho of Fitch Ratings puts it, “an anti-dilution right to subscribe for additional shares in the IPO.” As such, Fitch does not see negative risks to Alibaba’s ratings.
“Ant,” Ho says, “has leading market positions in China’s payment and fintech markets and its upcoming IPO should boost its capital structure. Ant’s payment subsidiary, Alipay, is crucial to Alibaba’s core commerce business.”
Given that many Chinese already downloaded the Alipay app, CEO Eric Jing is angling to export its model overseas. It’s collaborating with nine startups around the region, including GCash in the Philippines and Paytm in India. Ant plans to use the proceeds from its share listing to accelerate the pivot overseas.
Japan is a wildcard. Odds are, new Prime Minister Yoshihide Suga would go along with any Trump Alipay ban, just as his predecessor Shinzo Abe did with Huawei.
Then there’s the SoftBank factor. Though Son it likely to invest in Ant’s listing, the billionaire has huge ambitions for SoftBank’s own PayPay app. Son’s longer-term goal is to build a Japanese Alipay.
And the timing is fortuitous. Covid-19 has been a “gift” to digital payment providers, says analyst Michael Causton of research company Smartkarma.
Ant’s other problem is a Communist Party that can be ambivalent about disruption.
Xi’s “Made in China 2025” project aims to morph China into a global leader in artificial intelligence, renewable energy, robotics, self-driving vehicles and software. But Ant’s dominance over financial transactions, loans, investment products and wealth management make you wonder what many of China’s banks will have left to do a few years from now.
Giants like ICBC, China Construction Bank, Agricultural Bank of China and others may find mass-market banking an increasingly crowded place as Alipay and competitors spread their wings.
Ant’s scale, post-IPO, is sure to have China’s biggest financial names looking over their shoulders.
Bigger than the biggest
The market cap levels Ant is eyeing, says Michael Carter, head of global equities at Osaka Matsui Management, “make it more valuable than the Goldman Sachs Group and position it close to PayPal.”
Or, in the estimation of the Economist Intelligence Unit, Ant could boast a valuation akin to even JPMorgan Chase, America’s biggest bank. That is sure to rile hawks in Washington worried the US risks getting left behind. But also for bricks-and-mortar mainland institutions that can operate as mere extensions of the state.
Adding to the disorientation is Ant’s rise coincides with the coming disappearance of the fiat money that gives governments their main claim to economic relevance.
When you think of the shockwaves Facebook generated with its planned Libra digital currency, it’s easy to see the threats, real or perceived, that services like Alipay pose to officials from Washington to Beijing.
That said, Ant’s IPO is a milestone for the southern China economic super-region Xi is endeavoring to create. Though his crackdown on Hong Kong’s autonomy is spooking multinationals, the city is at the center of Xi’s Guangdong-Hong Kong-Macao Greater Bay Area enterprise.
The plan is to pool the fortunes and innovative energy of Hong Kong and Macau with nine municipalities: Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing in Guangdong Province. That’s a collective population of 72 million and gross domestic product (GDP) of roughly $1.7 trillion.
This clustering of four coastal cities into a high-tech megalopolis could just constitute a Silicon Valley East that churns out tech “unicorns.” The regions surrounding offer large pockets of trade, tourism and logistics. And lots of opportunities for Ant to spread and deepen its mainland business.
So there are your challenges, President Trump. Good luck stopping China Inc moving forward as you drag America Inc backward.