Failure of Ant Group’s mega IPO: What is China’s stance onfinancial liberalization and fintech?

By Felix Ting| 23th December 2020

On Tuesday, the 3rd of November, two days before theoriginal date of Ant Group’s dual listing in Shanghai and Hong Kong Stock Exchange, Chinese officials and regulators slammed on the breaks with what was planned out to be the biggest IPO in history. After summoning three Ant’s Grouptop executives for a meeting on Monday and founding “major issues”, they claimed that the company no longer meets the requirements for listing.

Ant Group is an affiliate company of Alibaba, the e-commerce giant founded by multibillionaire Chinese celebrity and entrepreneur Jack Ma. Ant’smain services includes Alipay, a mobile app which acts as a third-party online payment platform with over 1.2 billion users in China. On top of Alipay, Ant has also found successes in other digital financial services such as lending, insurance and investments.

After having raised $29.4 billion last year, Saudi Aramco’s IPO had originally held the record of being the largest IPO. This would have been beaten by Ant Group’s IPO which was set out to value at over $34.5 billion. With China’s desire of emerging into a global financial market, calling off a record breaking IPO seems to be out of line with their goals. What is China trying to prove through suspending Ant’s listing?

A week prior to the IPO, Jack Ma openly spoke at a conference in Shanghai, addressing Chinese regulators as a “club for the elderly” and stating that: “We cannot regulate the future with yesterday’s means”. While it remains unclear whether the suspension was an act of retaliation, a clear message from the Chinese government has been sent. No businesses can be exempt from state supervision in China and disrespect towards the government and authorities is intolerable.

The banking system in China has historically been dominated bystate-owned banks. These banks all work under the People’s Bank of China, its central bank. Together they conduct all banking services in the country, ranging from deposits, transfers, lending and investing. However, with the rising popularity of digital financial services. The Chinese consumers have shifted towards Alipay, leaving state-owned banks hanging out to dry.

Today, the market value of Ant Group is higher than any of the 4 state-owned banks and this is due to Ant’s digitally-focused business model. Before September, Ant has been experiencing tremendous growth in their consumer loans business. Millions of micro-lenders have been using their two borrowing platforms, Huabei and Jiebei. In response to this, banks have filed complaints arguing that although both entities are offering consumer loans, Ant Group face much less regulatory controls, resulting in unfair competition.

New guidelines and rules were then introduced in September by the authorities. Under these new regulations, Ant would be forced to retain 30% of the loans they have in their balance sheets. Meaning that in order to maintain their current state of the business, the company has to replenish up to $12billion in capital. This may significantly impact the firms stream of revenue, which may also lead to valuation problems when it decides to give the IPO another go. For state-owned banks, this situation helps them level the playing field with Ant as they may now be able to pawn-off some of its business back to banks while also facing more supervision and regulations than ever.

Chinese authorities also had major concerns on the implications of such a high calibre IPO on the country’s financial stability. They were worried that it would create a financial bust, as demand for Ant’s shares were 870 times greater than supply. Besides, the stock also had $3 trillion in retail demand, a lot of it being retail investors that are using margin lending by other financial corporations. Margin lending is a type of borrowing which loans money for investors to invest. With extreme price spikes ready to explode the stock and take prices upwards, it is very likely that if the IPO would go forward, it would create a price surge on the first day, followed by a sudden drop back to market prices in the few days after. Usually this has the most impact on retail investors that bought in to the excitement of a new listing and it is them that will suffer big losses.

It is still unclear what the future holds for Ant. Without completing the public listing before the start of 2021, Ant will now have to restart the whole IPO process with both Hong Kong and Shanghai Stock Exchange. China may have been a little late with the decision of halting Ant Group’s IPO just afew days before the listing, but it definitely demonstrated it is a country that is not afraid to show indecisiveness. 2021 will tell whether the authorities were right in their fears.