Corporate China’s shiniest star was just days away from seeing his Ant Group list on the stock market in a record $37 billion deal, when he chose to launch a blistering public attack on the country’s financial watchdogs and banks.
This was supposed to be the week that one of China’s biggest tech companies threw the most lucrative coming-out party in history, sending a swaggering message about the country’s economic might during the pandemic.
Instead, China sent a different message: No private business gets to swagger unless the government is on board with it.
The Shanghai Stock Exchange said in a late-night statement that it had postponed the Ant Group IPO because of "major issues" that might cause the company "not to meet the listing conditions or disclosure requirements." That came after the Chinese central bank and other Chinese government officials called in Ma and Ant Group executives for talks Monday.
The Shanghai bourse is "fulfilling its responsibility of self-regulation," Wang Wenbin, spokesperson for China's Ministry of Foreign Affairs, told reporters on Wednesday. "It is a decision made to better safeguard the capital market stability and protect investors' rights and interests."
It's not yet clear if or when the IPO will resume. Ant Group said in a statement that it would stay in "close communications" with regulators and the Shanghai exchange.
The Shanghai Stock Exchange's announcement comes just over a week after Ma said avoiding systemic risk is important, but publicly criticized Chinese regulators for stifling innovation by being too risk averse.
The I.P.O. would have brought in more cash than did Saudi Aramco, the state-run oil giant, when it went public last year. And Ant would have raised the money on the opposite side of the planet from New York, which has long been the favoured listing destination for Chinese tech groups.
The unprecedented intervention serves as a cautionary tale for Chinese entrepreneurs with lofty ambitions, even Communist Party members such as Ma. It also means that even if Ant satisfies new regulatory requirements, its massive business will only move forward under the watchful eye of China's strict regulators.
By firing a last-minute torpedo at Ant and Jack Ma, the company’s controlling shareholder and celebrity founder of the e-commerce titan Alibaba, the authorities made clear that international bragging rights mattered less than ensuring private companies know where they stand next to the state.
Ant sits at the intersection of two industries — finance and tech — that are facing intense scrutiny everywhere. American officials are circling the giants of Silicon Valley, plotting a reckoning for the power they wield over commerce and society.
Yet in China, the authorities under Xi Jinping, the country’s top leader, have brought a steely, uncompromising edge to their tactics for enforcing the Communist Party’s will.
The regulatory system was stifling innovation and must be reformed to fuel growth, billionaire Ma told a summit in Shanghai on Oct. 24 attended by the great and the good of China’s financial, regulatory and political establishment.
Chinese banks, he said, operated with a “pawnshop” mentality.
It was this speech that set off a chain of events that ultimately torpedoed the listing of Ant, the fintech titan Ma founded, according to interviews with government officials, company executives and investors. They all requested anonymity to disclose confidential details.
Stung by the attack, Chinese regulators and Communist Party officials set about reining in Ma’s sprawling financial empire, culminating in the suspension of the IPO on Tuesday, two days before the eagerly awaited market debut in Shanghai and Hong Kong, the sources said.
While Ma might not have realised the impact his words would have, people close to him had been baffled to learn in advance about the tone of the speech he planned to deliver, according to two sources close to Ma.
They suggested the 56-year-old soften his remarks as some of China’s most senior financial regulators were due to attend, but he refused to budge, believing he should be able to say what he wanted, the sources said.
“Jack is Jack. He just wanted to speak his mind,” said one of the people. Needless to say- it was a costly miscalculation.
Globe-straddling conglomerates have been leashed. A tycoon was disappeared into custody. In September, Ren Zhiqiang, a wealthy, politically connected property developer, was sentenced to 18 years in prison after he criticized Mr. Xi for the government’s handling of the coronavirus.
After Mr. Xi declared war on food waste this year, the official news media and video platforms turned against streamers who recorded themselves chowing down on extravagant spreads — a niche category of internet fame, but a remunerative one for its stars.
“What happened to Ant reinforces that sense that it’s really essential to show respect for party-state authority,” said Kellee S. Tsai, the dean of the School of Humanities and Social Science at the Hong Kong University of Science and Technology. “Capitalists have to play by the political rules of the game.”
For many businesses in China, this has been a year to be thankful — all things considered — for the government. Economic growth is bounding back. The authorities are keeping the virus largely under control.
Ant filed to go public in August, nearly a decade after the company was spun out of Alibaba. Ant’s Alipay app is used by more than 730 million people every month. It has become a major portal for personal credit, loans, investments and insurance in addition to a payment tool. But getting to this point was a long journey for Ant, one with numerous dust-ups with regulators.
More controls were already on the way. China’s banking and insurance regulator discussed new rules for online lenders in September. Tighter supervision of financial holding companies was scheduled to go into effect on Nov. 1.
Several senior financial regulatory officials were furious at Ma’s criticism, two sources told Reuters, with one source characterising the speech as a “punch in their faces”.
State regulators started compiling reports including one on how Ant had used digital financial products like Huabei, a virtual credit card service, to encourage poor and young people to build up debt, according to the two people.
The general office of the State Council compiled a report on public sentiment about Ma’s speech and submitted it to senior leaders including President Xi Jinping, the sources said.
Some of the reports indicated public sentiment was negative on Ma and his remarks, the people said.
Top Chinese leaders then became more involved and asked for a thorough investigation of the company’s business activities, which eventually led to the halting of the world’s biggest IPO, three of the sources said.
The chance of the flotation getting back on track in the near-term is slim, according to six of the people, as regulators look to tighten scrutiny of the company. No listing is expected for at least the next few months.
It was a stunning reversal for Ma, who would have added at least $27 billion to his net worth from the IPO.
In years gone by, most regulators had left the billionaire to his own devices, partly because of his close ties to some senior government officials, but also because of national pride in his success.
Ma, a former English teacher, is one of China’s internet pioneers, building an e-commerce empire with Alibaba and a fintech giant with Ant.
When the PBOC tried to regulate Ant’s payment and wealth management business about five years ago, Ma bypassed the central bank after failing to reach a consensus with regulatory officials and lobbied the central government. The PBOC later dropped those regulation plans.
“Jack Ma did not bypass the customary process of communicating with relevant regulators regarding Ant’s payment and wealth management business,” Ant’s spokeswoman said.
But with his Oct. 24 speech, Ma misjudged the shifting priorities of Beijing, according to one senior regulatory source, believing he could challenge the financial establishment yet retain the support of the central leadership.
The bigger picture was that one of the government’s main aims this year is to shore up the country’s financial sector and tighten regulatory oversight to prevent systemic risks in a pandemic-hit economy.
Even before Ma’s speech, Chinese regulators were gradually increasing their oversight of Ant, which has largely thrived as a technology platform free from costly banking regulations despite its bouquet of financial offerings.
The scrutiny has particularly intensified for the company’s rapidly growing online consumer-lending business, a cash cow, which sources demand from retail consumers and small businesses and passes that on to about 100 banks for underwriting.
The Shanghai speech was the trigger for a major escalation prompting senior political officials to ask regulators, including the central bank and China’s top banking regulator, for the thorough review of Ant’s businesses.
The watchdogs, who had for years wanted to rein in Ma’s fintech empire, moved fast after receiving written instructions from officials including Vice Premier Liu He, a trusted economic adviser to President Xi, said two of the people.
As part of this drive, regulatory officials rushed to publish a consultation paper this Monday to tighten rules for the country’s micro-lending business, which directly impacts Ant.
The draft requires micro-lenders to fund at least 30% of any loan they fund jointly with banks. Only 2% of the loans Ant had facilitated as of end-June were on its balance sheet, its IPO prospectus showed.
Top Chinese industry players including Ant and Lufax Holding Ltd, an online wealth management platform, were aware of the draft details weeks before its public release.
Lufax, which raised $2.4 billion in a New York IPO last month, had informed investors that regulators had required leading online micro-lenders to provide about 20%-30% of any loan they fund jointly with banks, according to two investors who joined its roadshow.
By contrast, Ant’s executives did not mention the possible regulatory changes during its two main calls with global investors during its roadshow last week.
Ant’s spokeswoman said the company was not aware of the details of the draft online micro-lending rules until they were published on Monday.
After the publication of the micro-lending consultation paper, Ma and the two top Ant executives were summoned to a rare joint meeting with four regulatory bodies.
They were told that the company, notably its consumer-lending business, would face tougher scrutiny over matters including capital adequacy and leverage ratios.
Regulators had been surprised by the scale and risk model of Ant’s lending division, details of which were disclosed in the IPO-related filings since late August. The unit, which includes Huabei and short-term consumer loan provider Jiebei, contributed close to 40% of the group’s revenue in the first half of the year.
A day later, the Shanghai stock exchange said it had suspended Ant’s IPO, citing a “significant change” in the regulatory environment, prompting the company to also freeze the Hong Kong leg of its dual listing.
China’s securities industry watchdog said subsequently that recent regulatory changes could have a “major impact” on Ant’s business structure and profit model. It said suspending the IPO was a responsible move both for investors and markets.
The suspension marked the nadir of what has been a gradually souring relationship over recent years between Ma’s corporate empire and Chinese regulators, from the central bank to the internet and markets watchdogs.
After the announcement, however, Ant released a statement in which it pledged to “embrace” regulation.
“It has no alternative but to do so,” Gavekal Research analyst Andrew Batson wrote in a report this week. “Ma’s hubris has now morphed into humility.”
"There's a saying in China: 'The tallest nail gets hammered down,'" said Duncan Clark, author of "Alibaba: The House that Jack Ma Built" and founder of investment advisory firm BDA China. And it would seem Ma just got hammered by the Chinese government, he said.
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