Chinese regulators postponed what would have been the world’s biggest-ever initial public offering of Ant Group in the Hong Kong and Shanghai stock markets, due to “some significant changes in financial technology regulations” in China. The surprise last-minute move reflects the Chinese government’s trepidation about betting the country’s financial future on a single entrepreneur, Alibaba’s Jack Ma, and an untested financial platform.
The announcement shocked financial markets. The stock price of Alibaba, the e-commerce platform founded by Jack Ma, fell 10% at the New York opening before recouping about half its losses.
Ant Financial’s planned $34.5 billion IPO would have valued the company at $315 billion, making it the world’s largest financial firm by market capitalization, with the potential to “redefine global finance,” as William Pesek wrote Oct. 10. That would have enhanced the prestige of China’s financial markets but at substantial risk.
If Ant Financial ran into trouble, for example, through loan delinquency rates higher than the 1% to 2% it claims, the damage to China’s prestige and prospects for reform would be incalculable. Ant claims to achieve extremely high credit quality through Artificial Intelligence systems applied to a gigantic dataset drawn from its 900 million customers. But some respected analysts in China’s Artificial Intelligence community think that Ant has overstated its ability to control credit risk.
Regulatory prudence justifies a closer look at Ant Financial’s risk management systems, but the last-minute timing of the suspension indicates a political motive as well as a technical concern. China’s political leadership was asked in effect to bet its prestige on a private firm armed with an innovation whose outcome remained uncertain. The grey heads of China’s State Council evidently decided that the risk-reward of this bet was less than optimal.
Jack Ma was summoned to a meeting with Chinese regulators last week. According to a public filing, Ant Group then informed the Shanghai Exchange that “significant changes in financial technology regulations” might prevent Ant Group from meeting the exchange’s listing and information disclosure requirements.
After consultation with the IPO’s sponsors, the Shanghai bourse decided to suspend the listing plan of Ant Group. The Hong Kong Stock Exchange followed suit hours later.
Ant Group also told the Hong Kong stock exchange in a separate filing that the company may not meet listing qualifications or disclosure requirements due to material matters relating to Jack Ma’s interview with Chinese authorities as well as recent changes in the Fintech regulatory environment.
Writing in the government-linked news site guancha.cn, Jin Guanping commented, “With the goal of safeguarding the rights and interests of financial consumers and protecting the interests of investors, the supervisory authorities decided to suspend the listing of Ant Group. The ‘Pause Button’ for Ant Group’s listing triggered speculation and discussion among some people at home and abroad. Regulatory agencies uphold the principle of ‘openness, fairness and justice’ in the capital market, and when problems are discovered and faced squarely, they must resolutely correct and solve problems. Ant Group has completed its listing and pricing, which can be described as a matter of public interest. There are many investors participating in the preliminary offer, involving the vital interests of millions of investors. The suspension of the listing of Ant Group is precisely to better safeguard the rights and interests of financial consumers, safeguard the interests of investors, and maintain the long-term healthy development of the capital market. Ant Group’s top priority to earnestly rectify problems and reform according to the requirements of the regulatory authorities.”
In simpler language, guancha.cn warned that the millions of small investors who made $3 trillion worth of bids for $34.5 billion worth of Ant Financial stock need to be protected. The fallout for China’s leadership would be devastating if the stock price were to crash in the future.
The issues identified by Chinese regulators have not been disclosed. They may have to do with Ant Financial’s risk management systems and exposure to loan defaults. With 900 million customers, Ant has the world’s biggest dataset for the application of machine learning to consumer and small-business credit quality. Within China’s Artificial Intelligence community, though, some analysts argue that Ant has expanded its loan book too fast to adequately control credit risk. The firm claims a default rate on its credit book of just 2%, but some critics believe that loan delinquencies are low because most of the credit was granted during the past three years, and will rise over time.
Evidently, the Chinese authorities have decided to dial back expectations and assess risks more carefully out of an abundance of caution. The damage to China’s financial system and global standing if problems were to emerge at Ant Financial after the IPO would be enormous, and the regulators believe that a more thorough risk evaluation is required. But these concerns well might have been addressed months ago. China’s pace of innovation is so quick that its leaders are scrambling to find the right balance between disruptive new technologies and prudent regulation.
Alibaba’s sharp price decline appears unjustified, since the firm has no direct relationship to Ant Financial, nor to its founder Jack Ma, who resigned as chairman in 2019.