Vladimir Putin made a very untimely cameo appearance on China’s financial scene this week. Well, not literally. But it was hard not to see Beijing’s takedown of Jack Ma’s Ant Group as anything but Putinesque.
Ma is, after all – arguably – the closest thing China has to an oligarch who thrives at the pleasure of a state that tolerates his monopolies. One who’s not gotten a bit too big for his britches – or gone too big internationally – for the leader’s comfort.
The Ant Group initial public offering that’s been disappeared was to be a hinge moment for China Inc. This was the moment Xi Jinping’s economy was going to prove homegrown success could create world-beating wealth.
Instead, Xi’s men may just have created a new verb to be coined in financial circles: “To get Jack Ma-ed” is when a government snatches financial defeat from the jaws of victory.
We’re all trying to snatch some logic from what happened. Why would Beijing scuttle a giant IPO that was set to remind Donald Trump’s America and the rest of the world just where the economic future lies?
Blame concerns about creating a giant asset bubble, some argue.
Others claim Xi’s team woke up Tuesday and realized Ant is more finance than tech firm and so needed to do undertake a major regulatory rethink.
Or, was Xi’s inner circle retaliating over Ma’s recent speech calling Chinese banks “pawnshops,” prompting the empire to strike back?
Let’s not overthink things. Right now, we don’t know. The story here, at its core, is this: China is showing that it is an economy that is unready for global primetime.
Something many China observers are saying this week is that Xi doesn’t care what the outside world thinks. Xi only cares about power, and no entrepreneur – not even the globally admired founder of Alibaba – will get in the way.
Fair enough, but doesn’t Xi’s drive to internationalize the yuan require the exact opposite?
For many, the notion that this is Xi flexing his domestic muscles is preferable to “Marx-Brothers-are-in-charge” jokes. As Andrew Batson of Gavekal Research headlines a new report: “Ant Stomped.” Xi’s message, adds analyst Jeffrey Halley of Oanda, is “there’s only one big boss in China, and it’s not Jack Ma.”
Regardless of possible power games, China just reminded us it’s putting the cart before the proverbial horse – opening up to the financial world before its political system is ready for it.
Yuan internationalization is the ultimate expression of Xi putting out a giant welcome mat. The dumpster fire of the Trump White House in the US created a void for China to fill at the ideal moment. And since 2016, Xi’s government has done a pretty solid job making the case that Beijing would be ready when the time came.
One of the first signs global financiers could do business with the Xi era was a 2012 pledge to allow market forces to play a “decisive” role in decision making. The 2016 inclusion of the yuan in the International Monetary Fund’s top-five currency club was a milestone for these forces.
It pressured Beijing to steadily liberalize the capital account, bow to the whims of speculators and publish credible data on foreign exchange reserves.
Moves after that to have Chinese bonds added to global indexes and stocks added to the MSCI were welcome steps in the same direction.
Ma’s $35 billion IPO was the icing on the cake the finance world thought that Xi was baking. It would’ve been bigger than Saudi Aramco’s impossibly large $29.4 billion IPO in 2019. And China’s previous IPO triumph on the world stage: Alibaba’s massive $25 billion listing in 2014.
The difference, of course, is that Alibaba listed on the New York Stock Exchange. This time, the fintech colossus Ma built was to list in Shanghai and Hong Kong, signaling a follow-the-money dynamic in which Xi’s government should be reveling. Instead, his party can’t seem to get out of its own way.
“By suspending Ant’s IPO at the last minute,” says Gavekal’s Batson, “and publicly reprimanding its chairman and founder Jack Ma, China’s financial regulators have demonstrated there is still a force more powerful than the coming wave of financial innovation: the state.”
It almost certainly has global investors wondering anew about the state of China’s embrace of capitalist forces. And the state of China’s underlying financial system. After the Shanghai stock market crash of 2015, regulators worked to curb excessive leverage.
That marked an about-face for agencies that spent the post-2008 global crisis period flooding all sectors with fresh credit and debt.
By April 2017, Xi himself declared deleveraging a matter of national security. Here, there’s a desire to think the end justifies the means.
Ma, in his now-infamous October 24 Shanghai speech, said systemic risk is no longer a problem for China, saying “the predilection for zero risks is the biggest risk in itself.”
As regulators push back against the company that operates AliPay’s mobile payment, personal finance and credit payment businesses, they can claim to be merely heeding Xi’s 2017 edict. The message: no company, chieftain or innovation is more important than that de-risking agenda.
Felix Salmon of Washington-based news and analysis portal Axios says there’s an underappreciated tension at play: Ant is one of the most systemically vital financial institutions in the world, and at the moment it’s barely regulated.
And since it would power borrowing, savings, investments, insurance, you name it, an Ant systems failing could have a giant snowball effect for hundreds of millions of people.
“The lack of an Ant Group IPO is bad news for global investors who wanted a slice of a fast-growing financial giant, and is also bad news for the nascent Shanghai stock exchange,” Salmon says. “But if a delay of a couple of months helps to bring pre-IPO clarity with regard to Ant’s future regulatory regime, no long-term damage will have been done.”
That last point is debatable. After all, if analysts at Goldman Sachs and advisory outfits like Motley Fool knew all this months ago, why on earth did Beijing not seem to notice?
For over two years now, Beijing regulators went back and forth on whether fintech outfits can act as mere middlemen or lenders having to set aside capital buffers. Ant’s business, in other words, should be a surprise to exactly no one.
Investors who were going all in on Ant “might nevertheless revisit their assumptions of growth given the clear signs of regulatory intervention,” notes analyst Kevin Kwek of Sanford C Bernstein.
Another question is where this leaves Shanghai’s STAR Market, which views Ant as its ticket to global primetime. It’s possible Chinese tech unicorns like Didi Chuxing might give STAR a pass, figuring the conditions behind this snafu are specific to the fintech space. Or, are founders reaching out to New York this week?
On November 2, China was on such a roll. A day before Trump received his likely comeuppance from voters, China was the only top-10 economy growing and beating Covid-19. And its $16 trillion bond market was scoring shoutouts from the likes of hedge fund celebrity Ray Dalio of Bridgewater Associates. Foreigners are piling into yuan-denominated assets.
A day later, Beijing reminded the Dalio’s of the world of the dangers of trusting a helter-skelter regulatory apparatus run by thin-skinned micromanagers.
We’re talking a lot of bewildered investors here. Ant’s dual Hong Kong/Shanghai listing attracted at least $3 trillion of orders from individual investors.
That’s roughly twice the annual GDP of Putin’s economy. And yet Xi this week demonstrated why it might be better suited to continue operating in the orbit of BRIC nations – Brazil, Russia, India, China – for a while longer than taking on the majors.
There’s no doubt China is a dominant force in trade, demographics and culture. It’s the financial future, too.
But as a trusted force in first-world market finance in 2020? Not so much.
Nothing about internationalizing the yuan or getting Chinese assets added to indexes makes China Inc. more transparent; its government or companies more shareholder-friendly; its financial system sounder; or its shadow-banking boom any less of a risk to future stability.
These upgrades require bold and meticulous heavy lifting. They require reducing the dominance of state-owned enterprises, creating greater space for a Big Bang supersizing the private-sector and curtailing credit and debt for growth.
Last week in Beijing, Xi articulated a plan to do just that. China laid out an ambitious – and plausible – roadmap for dominating industries from artificial intelligence to finance to healthcare to renewable energy to semiconductors by 2025 and beyond.
This week Xi’s team is reminding us that grand talk is no substitute for implementation.
The story of Ant is still being written. The price for Ma’s impolitic complaints about Beijing’s regulators may be substantial changes to Ant’s internal mechanisms, business model and governing board structure.
This is not a mere blip. All this could cost Ma billions and foist on the investors behind those $3 trillion of bids a much less appealing company.
Already, Batson notes, “Ma’s hubris has now morphed into humility,” resulting in a statement pledging to “embrace regulation” going forward. That is not just sensible, it is prudent. “Indeed,” Batson says, “it has no alternative but to do so.”
But investors do have alternatives, no matter how big and promising a country in question might be. They now have to wonder when the next Chinese CEO they’re betting on might suddenly “get Jack Ma-ed.”