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Why Did Chinese Regulators Suspend Ant Group's IPO?

Nov 5, 2020 8:06 AM 4 min read

Remember Ant Group’s $35bn rockstar IPO? That’s not happening...yet.


Wait, What?

It was going to be Ant Group’s day in the sun.

China’s answer to JPMorgan Chase, a coming of age for global fintech, and the world’s biggest IPO to boot.

Ant’s plan to go public via a $35bn IPO in Shanghai and Hong Kong was initially endangered by the US State Department’s threats to include its name to its trade blacklist (the so-called “Entity List”).

In the end, Chinese regulators spoiled what was going to be one of Jack Ma’s greatest triumphs.

Less than two days before Ant’s stocks were supposed to begin trading (November 5th), the Shanghai Stock Exchange sent the company notices saying its listing may no longer meet “qualifications or disclosure requirements”.

Recent changes in the “fintech regulatory environment” were cited as reasons for suspension.


What Changes?

On Monday, China’s banking regulator issued new draft rules for online microfinance businesses. These included higher capital requirements for loans and tighter controls on lending across provincial lines. Online lenders will now need to fund at least 30% of any loan they supply jointly with banks.

This could force Ant to redo its balance-sheets and keep more of capital on its books: currently, 98% of the credit it generates is held as assets by other firms.

The new rules will not be finalised until December, and Ant may very well agree to comply with them.

But this comes at a cost. Involving itself more in the lending business could make Ant be regulated as a financial firm rather than a tech one. This brings with it its own set of nitty-gritties and constraints.

Which brings us to...


How Will the New Rules Affect Ant?

What the new rules could do is jeopardise Ant’s role as an intermediary between banks and borrowers.

Remember - Ant doesn’t define itself as a lender or even a banking company. In fact, it prefers to refer to its business model as “techfin” instead of “fintech”, highlighting that it is primarily a tech intermediary. This distinction is crucial to make to remain in the good books of China’s big banks and their powerful political backers.

But evidently, this appeasement wasn’t effective enough.

On Monday - Ma and company executives were summoned to a rare meeting attended by the People’s Bank of China and top financial regulators. During this meeting, Ant’s representatives were reportedly told that it would face increased scrutiny and be subjected to the same capital restrictions as traditional banks (i.e. The new rules we talked about before).


But What Do Regulators Have Against Ant?

Regulators’ suspicion of Ant may stem from the latter’s outsized influence within China, the treasure trove of user data it owns, and its expansion at the expense of traditional banks. Its Alipay app has become indispensable for 730 million users, and it has developed into a critical platform for obtaining loans, insurance and investment products.

Officials are also not sold on Ant’s techfin pitch: they are more inclined to view it as a financial firm and thus they argue that they should be regulated as such.

Guo Wuping, the head of consumer protection at China’s banking regulator, for example, argued recently that Alipay’s credit function - Huabei - is no different from a credit card issued by a bank. And the platform’s loan feature - Jiebei - is no different from a bank loan.

Guo claimed that the lack of proper regulation of the fintech sector had enabled firms to overcharge consumers, causing “some low-income people and young people to fall into debt traps, ultimately harming consumers' rights and interests and even endangering families and society”.

On a smaller (but not-very-insignificant) scale, regulators’ misgivings may be due to wariness about Ma who, whilst conservative by Chinese standards, may be too outspoken for Beijing’s liking.

In fact, only ten days ago, a euphoric Ma extolled Ant’s prospects and criticised regulators for being too risk-averse. Red tape, he said, only held up innovation - something he has said repeatedly over the years.

Such comments may seem blasé to most people. But in a country like China, they are akin to playing with fire.


Investor Ire

Following the suspension in Shanghai, Ant announced that it was suspending its market debut in Hong Kong as well and apologised to investors “for any inconvenience”.

For now, all transactions stand cancelled. That’s going to cause more than a little “inconvenience”.

Millions of shares were traded in the over-the-counter market prior to the fintech giant’s debut, many at a c. 50% premium to the listing price of $10.32.

After all, Ant’s IPO was a big deal. It was already over 800 times oversubscribed in Shanghai. Its dual listing had attracted at least $3trn of orders from individual investors. Institutional investors subscribed for over 76 billion shares, more than 284 times the initial offering tranche.

To top it all, Ant’s shares were scheduled to float on Shanghai’s newly-established STAR Market, created as the country’s answer to Nasdaq to lure Chinese tech firms with listings overseas back home.

Talk about sending out all the wrong signals!


What Now?

Some news reports say the IPO may take place after six months. The immediate fate of the billions of dollars already tied to the derailed IPO is still uncertain, although company sources say all money will be returned to investors sooner or later.

Meanwhile, if Ant decides to comply with the new rules - which is likely - it may need to overhaul much of its business. Not only will this require time, effort and capital, it also brings with it considerable risk and volatility.

Not to forget - will investors be as excited for financial company Ant as they were for techfin firm Ant?


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