Capitalism has clashed with Communism, spectacularly. And Ant Group, two days away from conducting the largest initial public offering in world history, is the casualty.
They say shares in mainland China are no better than options. That's because the Communist government rules by command. What it says goes, and it can change the rules overnight.
That truth has never been clearer than now. It has changed the rules overnight for the world's largest initial public offering. The prospective US$37 billion listing of the Alibaba Group (BABA) spinoff Ant Group has been called off, at least temporarily, one day after Alibaba co-founder Jack Ma was summoned for a chat with the authorities that clearly did not go well. Not at all.
Never before has a stock sale been called off at the last minute in this manner. The IPO had been cleared by regulators and the stock exchanges in both Shanghai and Hong Kong, only for the mainland side to renege on its promised clearance.
Why? Ma last month took the risky step of criticizing in public the Chinese banking system, and by implication the Communist Party that sits atop it, at a financial summit in Shanghai. Ma said Chinese big banks had a "pawnshop mentality," while Ant was extending credit to consumers and companies with little other access to borrowing.
"We cannot manage an airport the way we managed a train station," Ma said. "We cannot use yesterday's methods to manage the future." Those comments drew commentary in official media from the head of consumer protection at China's banking regulator, saying online financial products are not different from traditional ones. Fintech companies should be regulated in the same way as banks, Guo Wuping said in a critical article in the state-run 21st Century Business Herald.
On Monday, Ma as well as Ant Executive Chairman Eric Jing and Ant CEO Simon Hu got called in to see the central People's Bank of China as well as China's banking, stock and foreign-exchange authorities.
Ant then in short order filed late on Tuesday local time with the Hong Kong Stock Exchange to say that it had been notified "by the relevant regulators" in mainland China that its proposed A share listing on Shanghai's Nasdaq-style STAR Market was being suspended. As a result, the H share listing in Hong Kong is also being suspended. The dual listing was supposed to happen tomorrow, November 5.
Ant said that the company "may not meet listing qualifications or disclosure requirements due to materials relating to the regulatory interview of our ultimate controller, our executive chairman and our chief executive officer by the relevant regulators," as well as recent changes in the regulatory environment for fintech companies in mainland China.
There were no details, which the company says it will share "as soon as possible," as well as the process for refunding the money. Ant "sincerely apologizes" to investors "for any inconvenience caused by this development," it said in a social-media post.
Ant was looking to sell equal blocks worth US$17.2 billion in stock in Hong Kong and on Shanghai's Nasdaq-like STAR Market, which with an overallotment would total US$37 billion. The first attempted simultaneous listing on those two markets is officially a disaster.
The Shanghai stock exchange said that Ma had been called in for "supervisory interviews." There were "other major issues" including changes in the fintech regulatory environment, it added, producing a "material event" that may cause Ant to fail to meet issuance and listing conditions. "Our exchange has decided to postpone the listing of your company," the Shanghai stock exchange stated.
It's likely that Ant's position as a financial company is the issue. It had previously painted itself as a financial powerhouse, without necessarily holding the appropriate banking or wealth-management licenses. But it recently changed its name to Ant Group from Ant Financial, and began stressing that it is a shopfront linking consumers with financial products from banks and fund managers.
Ma established Ant's flagship app, Alipay, in 2004 as a way to hold funds in escrow so buyers and sellers on Alibaba's Taobao e-commerce site could transact with confidence. Ant spun out of Alibaba in 2014, with Alibaba still owning one-third of Ant.
The surge in e-commerce left Ant with huge temporary cash balances. It processed US$17 trillion in transactions for the year through June, making it the largest processor of payments in the world, above Visa (V) or MasterCard (MA) . Alipay and its competitor WeChat Pay from Tencent Holdings (TCTZF) are omnipresent in China, where the e-wallets have allowed 1.4 billion people to pay with a tap or a QR code, without the need for a credit card. Ant allows small businesses to get loans, and allows consumers to buy insurance and investment products, through its platform.
It is one of the quirks of the "One Country, Two Systems" system of governance that Hong Kong and mainland China have very different stock markets and regulators.
In Hong Kong, the government is attempting to rule through law, arresting critics and prosecuting them for the most pathetic or arcane of crimes. But there is rule of law, too, to some degree, particularly when it comes to the city's prized finance industry. With free markets and a laissez-faire attitude to regulation, shareholders and listed companies can still be confident in the environment where they operate.
The same is not true in mainland China. If the Beijing powers want to suddenly double the number of licenses for mobile-phone operators overnight - just as a made-up example - they can do so without deliberation or any warning. That would clearly be a very damaging state of affairs for shareholders of the existing telecoms. But they would have no recourse, in a country where the courts function merely as an extension of the Communist Party.
The Communist Party is flexing its muscles by forcing the Ant IPO to stop. It is also revealing the huge hindrances and risks that foreign companies and investors face in doing any sort of business in or with Communist China.
Mainland China tightly controls and manipulates the country's currency, the yuan, which does not trade freely. Worried that cryptocurrencies like Bitcoin pose a threat, regulators are rolling out a digital blockchain-like yuan, apparently ignoring that most yuan in the banking system is digital already. The whole point of Bitcoin is that it is not controlled by central bankers, but the digital yuan would be.
The sheer size and financial might of Ant and Alibaba also pose a threat to the Communist Party's control over the Chinese economy. The Ant IPO would have given the company a market capitalization of around US$312 billion, larger than the annual economy of Egypt, and comparable to that of Colombia. Ma had already been summoned in recent years by President Xi Jinping for a private chat to tell him who's boss.
The sheer amount of cash deposited by prospective shareholders in Hong Kong moved markets, as I explained last week. It led to a record amount of liquidity, the equivalent of US$56.5 billion, being parked with the Hong Kong central bank in the clearing and reserve accounts of commercial banks. That forced the central bank, the Hong Kong Monetary Authority, to sell Hong Kong dollars in order to maintain the Hong Kong dollar's peg to its U.S. counterpart. There will now be a drain on the Hong Kong dollar as that money flows back out.
Alibaba shares continued their slide in Hong Kong trade on Wednesday. The stock, listed under HK:9988, closed down 7.5%, after they lost 8.1% in New York the day before.
Ma, with a US$58.1 billion fortune according to the Bloomberg Billionaires Index, runs neck and neck with Tencent founder Pony Ma (who is no relation) and his US$59.4 billion net worth for the title of China's richest man.
Alibaba's Ma is sure to hit a giant payday when the Ant Group IPO does finally occur. He has, however, already stepped down from his executive roles at Alibaba, and has pledged to reduce his holdings in Ant to an 8.8% stake.
The Ant offering will surely get off the ground eventually. But after this clarification that any shareholders own a bit of a business that really ultimately belongs at the behest of the Chinese Communist Party must ask themselves what they are really buying in the end.