The Problem with Ant Group's IPO
Let's talk about the delayed IPO of Ant Group, why Jack Ma was called in for a chat by Chinese regulators, and see if an analysis of the history of China's banking system can explain this mess.
Welcome to the first long-form newsletter from Sinobabble (newsletter #4 if you were already subscribed). I’ve decided to move over to Substack for more flexibility, and you’ll still get an email letting you know whenever a new episode of the podcast is released.
I have also started a fortnightly series exploring a breaking news story or current affairs issue from a historical perspective. This is the first in that series — I hope you enjoy!
News of Ant Group’s delayed IPO hit the headlines on November 3rd, causing a stir as the world’s largest IPO was met with unprecedented interference from Chinese regulators. The Fintech firm, formerly known as Alipay, started as an online payment platform established by the Alibaba Group, and has since expanded to include a suite of financial products and services. The company was backed by former Chairman of China’s largest e-commerce platform Alibaba and second richest man in China Jack Ma, who saw his own net worth plummet around $3 billion when the announcement was made.
The main reasons for the delay are as yet unknown, as Ma and other heads of Ant group were called in for a meeting with China’s banking and securities regulators. However, rumours abound that one reason for the halt may be due to Ma’s previous comments about the current state of the financial industry in China.
In October, he spoke to an audience of financial executives, policy makers, and academics at the Bund Financial Summit, decrying the “Pawnshop attitude” of traditional banks. He said that the requirements of collateral assets for financial lending was outdated, and said he wanted big data to be in charge of the financial future, where trust equals wealth, relieving pressure on smaller firms that have fewer physical assets or collateral. Speaking in Shanghai, the billionaire said that "Today's financial system is the legacy of the Industrial Age," Ma said. "We must set up a new one for the next generation and young people. We must reform the current system." It may well be that these comments are what got him into trouble and contributed to the delay of Ant’s IPO.
I think the underlying issue here is that Ma is essentially trying to get ahead of the current financial system in China, which he sees as overly bureaucratic and outdated. Ma seems to be counting on the imminent implementation of the Social Credit System (SCS) to revolutionise the system. The SCS has started to be rolled out across the country, but has not yet been made national, nor centralised, and has no doubt been delayed due to the Coronavirus.
How is Ma’s criticism of Chinese financial institutions linked to a backlash from regulators? To get to the bottom of this, we have to understand the nature of China’s banking system, and why it is so outdated and slow to adapt.
Before 1978, China only had one bank, the People’s Bank of China (PBC), which acted as both a central bank and a commercial bank, with all interest rates and loan amounts being centrally determined. During the reform era after 1978, four new central banks were established, each designed to handle a different core function: Bank of China (BOC) functioning like a large international bank, the China Construction Bank (PCBC) providing finance for infrastructure and enterprise development, the Industrial and Commercial Bank of China (ICBC) financing commercial enterprises, and the Agricultural Bank of China (ABC) providing services to rural areas. The PBC became the central bank and was put in charge of formulating and implementing fiscal policy, issuing currency, managing China's Forex, and regulating the financial market.
Throughout the 90s central control began to ease up. Banks became more commercial in their operations, responsible for their own profits and losses. By the end of the 90s, privately owned commercial banks also began to appear on the scene, and in 1998 the China Securities Regulatory Commission was established. Despite the flourishing of new financial institutions, the majority (around 70%) of China’s assets remained in the hands of the large state-owned banks, which financial analysts have pointed out have a number of major weaknesses, including low profitability, declining net-worth, and a large proportion of non-performing loans, mainly in the State-Owned Enterprise sector. Despite the rapid growth of China’s GDP over the past few decades, studies of China’s banking system conducted in the early 2000s showed that the industry overall is unprofitable and inefficient in the long run.
The Chinese Government essentially controls finance and can make demands of even commercial banks. The main priority of the CCP is domestic stability. All banks are expected to provide low cost loans to enterprises in order to contribute to economic growth and high employment rates, despite the possible risks. The government has been slow to economic liberalisation, allowing for market-based interest rates while still encouraging commercial banks to follow the rate set by the PBC.
Add to this the opaque structure of traditional banks, and their old-fashioned rules that stifle lending to small and medium-sized businesses, and China’s financial institutions become essentially bureaucratic behemoths. As economic growth slows and competition among financial institutions increases, individuals and households with significant assets will begin to seek better returns on their investments. China’s traditional financial system simply does not go deep enough, and this is where the non-bank, non-traditional sector of China’s economy comes into play.
Lending from non-state, non-bank entities (otherwise known as shadow banking) has been used in China for several decades as a way for local governments and small firms to get around the central government’s restrictions on borrowing and lending. China’s shadow banking industry is still relatively small, but it is growing, and is more flexible than traditional firms stifled by government benchmarks and demands. It’s expanding rapidly and its more customer-friendly approach gives customers not only better options than traditional banks, but also more accessible options as more and more services open up in the online-only space.
More importantly, the growth of the shadow economy reveals the demand among China’s population for alternatives to state-owned and commercial banks, which are slow to lend and cumbersome to navigate. This is where new age companies such as Ant Group, and their competitors such as Tencent, come into play. Though Ant Group is not exempt from oversight from Chinese regulators, as with most tech companies, it tends to move faster than governments can keep up. Similar problems in the West can be seen with companies such as Facebook and Google, which race ahead of policy due to the rapidly developing nature of their proprietary technology.
Ant Group is an extremely powerful company with a range of financial products that are easy and convenient for everyday mobile users to access. Besides online payment services, it boasts a wealth management service (which hosted the former largest mutual fund Yu’e Bao), as well as a virtual marketplace for other financial institutions to sell their products. Innovative apps such as Ant Forest reward users for environmentally friendly actions such as cycling to work or buying sustainable products by planting trees in real life.
The real problem I believe lies with the products that compete directly with the government’s own offerings, MyBank, a cloud-based online-only bank, and Ant Cash Now, a loan company. As a private company, Ant Group risks becoming more powerful - and more attractive - than both commercial and state run banks, which are by comparison slow moving, difficult to navigate, and clunky.
With a captive audience already using Alipay services (870 million as of 2018), it would be a straightforward matter to advertise these other products to users, creating a virtual monopoly on China’s financial services industry. Ant Group also has international reach, partnering with local providers to accept payment via Alipay, meaning the global influence of Ant Group has the potential to outstrip that of the Chinese government.
While the full details have yet to be released, to me, this is the crux of the problem. Ma is trying to move into the future, realising the potential of big data and harnessing the power that the Social Credit System will provide in order to solve today’s problems. Ma wants to move as fast as possible, so that smaller companies and entrepreneurs can get in on the growth, bringing the Chinese economy along with them. But this means moving faster than the Chinese banking system, which means moving faster than the Chinese Communist Party. And this is something that no one is allowed to do, not even the superstar of the Chinese economy himself.
References
Asia Times Financial, Global financial system must include all internet banking: Jack Ma
BBC News, Jack Ma's Ant Group: World's biggest market debut suspended
Bloomberg, China Plans Deeper Ant Crackdown With Bank Funding Curbs
China Banking News, Jack Ma Calls for Replacing “Pawnshop Mentality” of Traditional Banks with Big Data-based Credit System
CitiBank, Bank of the Future (pages 40-42)
Dick K. Nanto & Radha Sinha (2002) China's Banking Reform, Post-Communist Economies, 14:4, 469-493
Masood, O., Sergi, B.S. China’s banking system, market structure, and competitive conditions. Front. Econ. China 6, 22–35 (2011)
Okazaki, Kumiko, Banking System Reform in China: The Challenges to Improving Its Efficiency in Serving the Real Economy: Banking System Reform in China, 2017, Asian Economic Policy Review, 12(2):303-320
United Nations Climate Change, Alipay Ant Forest: Using Digital Technologies to Scale up Climate Action | China
Wall Street Journal, More Than a Third of China Is Now Invested in One Giant Mutual Fund
Xiaodong Zhu, “The Varying Shadow of China's Banking System,” University of Toronto Department of Economics