Ant Group – Whoops apocalypse.

Jack Ma has made someone very cross.

• The Chinese regulator has forced both the Shanghai Stock Exchange and the Hong Kong Stock Exchange to suspend the Ant Financial IPO at the last minute in what can only be interpreted as a move to remind Jack Ma who really is in charge in China.
• Three days before Ant Financial was due to go public, Jack Ma was summoned by the Shanghai Stock Exchange for “supervisory interviews” due to last-minute changes to the “financial technology regulatory environment”.
• Chinese state media (see here) is saying that the suspension of the IPO will “safeguard the rights and interests of financial consumers” and that “the top priority of Ant Group is to earnestly rectify and reform according to the requirement by regulatory authorities”.
• In plain English this means that the regulator changed the rules at the last minute such that Ant Group was no longer compliant with them, forcing the Shanghai and Hong Kong stock exchanges to suspend the IPO.
• The People’s Bank of China (PBoC) and China’s banking regulator have released new last-minute draft regulations that cap the size of online loans to “prevent low-income groups and young people” from falling “deep into debt traps”.
• There is no question that lending to low income and young people needs to be carried out in a responsible manner, but the real question is why change the rules at this exact moment?
• The PBoC and the Chinese regulator will have been aware of these issues for months or even years while Ant Group has been developing its offering making the timing of these changes very strange.
• This is particularly the case as the Chinese Communist Party (CCP), and all governments, to be honest, have an interest in seeing paper cash transactions go digital.
• This is because digital transactions are much easier to track making both money laundering and ordinary transactions easier to identify giving a much better picture of who is doing in what within the economy.
• Hence, I think that the greater degree to which online offerings like Ant Group penetrate the economy, the easier it will be for the CCP to monitor and control financial transactions within the economy.
• So why would the CCP want to derail an IPO that, in theory, could cause a significant setback to the penetration of online and digital finance in China?
• The only answer I can come up with is that some in the CCP feel that Jack Ma had gotten too big for his boots and that he needs to be reminded who really is in charge.
• A week or so ago Jack Ma called out the international regulatory framework as not fit for purpose in China given the way the market for financial services there is developing.
• He also went on to say that the financial system should depend more on local regulation and the ecosystem of “lakes, ponds and streams” that are responsible for capital flows into the distant regions of the economy.
• I interpret this to mean that regulation should be devolved to the regions thereby reducing the power of both the central government and the big banks over the financial system.
• This is what I suspect has annoyed parts of the CCP as the last thing that a centralised control system wants, is to devolve its power into the regions.
• Hence, I think the CCP and the PBoC have decided to remind Jack Ma who really is in charge in China and who decides how the country’s financial system is regulated.
• Ant Group will now have to go away and fall into line with these new regulations before it can resubmit itself for IPO.
• This also means that all of $34.5bn that has been taken from investors for shares will have to be returned and the process restarted at a later date.
• The new regulations may also cause the financial performance of Ant Group to deteriorate as there will be higher costs of compliance and possibly lower total loan amounts.
• The net result could well be a lower valuation when Ant Group finally makes it to market as investors have been reminded that business in China is conducted with the permission of the state which can be withdrawn at any time.
• This is another cautionary tale for those that do business in China as Jack Ma is likely to be considerably poorer and less influential as a result of this incident.