The 11th-hour regulatory suspension of what could have been the world’s largest and most anticipated initial public offering (IPO) in recent years could be a fiasco of the Ant Group’s founder’s own making.
Indeed the blocking of the US$35 billion IPO, which was scheduled for Thursday, could be just the start of a push by Beijing to rein in Chinese magnate Jack Ma’s e-commerce and financial operations.
This culminated in a late-night suspension notice from the Shanghai bourse Tuesday evening that brought the IPO scheduled for Thursday to a halt.
Some speculate the saga may have started when Ma lamented Beijing’s financial regulations at a summit, which was interpreted by some as openly refuting the position of a senior state leader. But the suspension of Ant’s IPO reflects concerns among financial regulators that the rapid expansion of Ant’s loan portfolio may entail more risk than the firm has recognized. The Chinese authorities have ordered Ant Financial to increase its reserves as a precondition for the IPO.
The application of Big Data and Artificial Intelligence to credit scoring can reduce risks, but Ant Financial’s claim that it can keep loan delinquencies in the 1% to 2% range may be exaggerated, some Chinese Fintech specialists believe. Ant’s portfolio consists mainly of new loans that haven’t had time to show problems, and it may have underestimated default risk.
Ma, whose Ant Group is an affiliated company of Alibaba that operates the lucrative AliPay mobile payment, personal finance and credit payment business, spoke at a packed auditorium at the Shanghai Bund Financial Forum on October 24.
He said that systemic risk was not the issue in China, adding, “The predilection for zero risks is the biggest risk in itself.” Ma spoke after Chinese Vice President Wang Qishan delivered a keynote speech via video about protecting against system-wide risks in the financial sector, including potential disruptions from new technologies and business models.
“There should be a fine balance between encouraging financial innovation, invigorating the market, opening up the financial sector and building regulatory capacity,” Wang said.
Ma’s remarks were construed by many, including over social media, as contradicting Wang’s gauge of the situation.
While addressing the forum, Ma said that most established banks were being run as “pawnshops” – merely issuing mortgages and secured loans on assets and guarantees – and that a new credit-based system should be adopted for banks to evolve, hinting that Ant Group’s big data-based credit rating and appraisal were superior in evaluating risks.
Speaking in his capacity as an honorary co-chair of a United Nations digital cooperation task force, Ma said that genuine innovation never resists regulation but that yesteryear mindsets should not seek to stymie innovation and that an airport must not be run like a train station, according to Shanghai’s official Jiefang Daily.
It was unclear how Ma’s message was received by forum attendees, including the former governor of the People’s Bank of China (PBoC) Zhou Xiaochuan and his successor Yi Gang. The heads of China’s banking and securities watchdogs and Shanghai bourse managers who had just initially greenlighted Ant Group’s landmark listing were also in attendance.
Wang’s keynote speech at the forum, which was syndicated by the People’s Daily the following day, in some ways hinted at the Ant Group IPO’s suspension.
The state newspaper quoted Wang as saying that the right balance must be struck between innovation and regulation and that “financial institutions and players must, first and foremost, serve the manufacturing sector and the real economy, as well as SMEs and the underprivileged.”
“They must innovate and seek profit within the red line of risk prevention and management and not let innovation become a new Ponzi scheme,” he said.
Wang’s remarks were not included in the original transcript of his speech as it was distributed to media by the forum’s organizer. Long before Ma started to build his business empire, Wang had served in key state posts to tackle malpractice and reform China’s financial sector, including as governor of the China Construction Bank and deputy premier in charge of finance and commerce. In 2008, he worked closely with then US Treasury Secretary Hank Paulson to contain a global financial crisis touched by the implosion of the market for complex credit and mortgage derivatives.
Meanwhile, Ma and his business empire, including Ant Group, have faced a barrage of criticism since the forum in what appears to be a coordinated campaign by the Communist Party’s propaganda department.
Xinhua and newspapers overseen by the PBoC have all taken shots at Ma’s business model and the huge profits his businesses have made from issuing high-interest loans to hundreds of millions of AliPay users, many of whom are college students and job starters. Ant Group recently revealed that its net profit in 2019 hit a new high of 17 billion yuan ($2.55 billion).
Moreover, an ad hoc meeting on financial stability convened by Deputy Premier Liu He on the last day of October, just one day after the conclusion of the Communist Party’s high-stakes annual plenum, signaled a regulatory clampdown.
Bloomberg News reported that Beijing is now scrutinizing Ant’s lucrative platforms that pass on loans from banks to millions of consumers. Banking regulators apparently plan to urge lenders to avoid Ant services and to make sure portfolios adhere to strict draft rules announced on Monday, the news agency said.
Observers say it could be the fundamentally divergent views about financial risks between Ma and Wang, as well as Ma openly contradicting Wang at the forum, which led to Beijing clampdown on Ma, whose e-commerce and fintech business empire used to be hailed as a matter of national pride.
A professor at the Peking University’s School of Governance told Asia Times that the incident has opened up fault lines between the top leadership and the country’s business elite and that it was increasingly evident that the Communist Party has grown wary of the rising sway of prominent businessmen such as Ma.
“Some say Jack Ma should bite his tongue and not openly challenge Wang, but that’s just an incident, one example of more fundamental, long-running disputes over regulation between businessmen like Ma and the central leadership,” said the scholar who declined to be named because he was not authorized to speak to foreign media.
“If it was not for the Shanghai forum, the dissension and Beijing’s impatience would be exposed in other ways. I don’t think the new, harsher rules on internet finance and borrowing announced by watchdogs in the past few days are a direct response to Ma’s remarks at the forum, as these rules must be months or years in the making.”
“But one thing is for sure, Ma and Beijing have not seen eye to eye on many regulatory issues for a long time,” he said.