Ant Group’s go-to-market promised to be the Initial Public Offering of the year and the largest in history. Investors were sure that this Chinese fintech was going to become a disruptor in finance in the Asian giant, facilitating loans to the population with its risk measurement system.
Hong Kong and Shanghai were eagerly awaiting the date and it was predicted that once in the secondary market the company could reach a capitalization of 310 billion dollars, a value far above that of banks with long tradition like J. P. Morgan.
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Shanghai and Hong Kong Stock Exchanges were preparing a feast when the China Securities Regulatory Commission abruptly called off the party. A recent change in regulation attacked Ant Group’s business model. The Chinese authorities said they were seeking to protect investors with this decision while the Western press suspected that the measure was a retaliation for the Oct. 24 remarks by Jack Ma, who mentioned that Chinese regulation killed innovation.
Since November, the shares of Alibaba Group, which currently owns 7% of Ant, have been in sharp decline after a spectacular year, losing 17% of their value.
Chinese technology companies such as TikTok or Huawei are persecuted in the United States, where they are considered a threat to the security of the nation because of their ties to the country’s Communist Party. Why is China also going after its own tech giants?
Ant Group: credits for everyone
Most of the Western press has singled out Jack Ma‘s October statements as the spark that ignited the fury of the Chinese Communist Party bureaucrats. However, this explanation is more than simplistic.
The Chinese authorities had eased the paperwork for Ant Group before Ma made the controversial remarks about Chinese regulation. But the regulation affecting Ant Group had been under discussion for more than a year.
China is dealing with a dilemma: it needs to grant more credits to the population to increase its consumption capacity, but it also needs to do it responsibly to avoid a crisis like the sub-prime. From 2008 to date, the debt-to-income ratio of the Chinese population has increased from 17.9% to 61.4%. The current proportion is far from representing 98.6% of the United States before the 2009 crisis, but in this country the debt did not grow as fast.
More than a derision for China’s second-richest man, the decision of the government led by Xi Jinping seems to be more motivated by concerns about an uncontrolled increase in debt that could trigger the unleashing of a crisis in the economy that has driven the world GDP growth.
The regulation that affects Ant Group obliges the company to assume a greater proportion of the risk in its operations. In its current business model, the company charges a commission for offering to create loans, package them as securities, and sell them to other financial institutions, most of them state-owned. However, changes in the law require Ant to participate with at least 30% of the capital offered, limiting its growth and making it a finance company rather than a technology company.
Jack Ma has not taken the new measures well and has taken on the role of a rebel businessman, even though he is affiliated with the Communist Party of China. This could even be a mere pose to show distance from the CCP and thus get closer to Wall Street.
In the end, the conflict, rather than being a power confrontation between the Chinese tycoons and the CCP, is a logical measure in an economy that has always bet on planning.