Ant’s Gambit

Billionaire Jack Ma, the co-founder and former executive chairman of Alibaba Group, made his first public appearance in three months of January 20, 2021 (Image from Shutterstock)

Jack Ma was one of China’s most revered businessmen. The co-founder of Chinese technology giants Alibaba and Ant Group, Ma has long been known for his confidence and oratory. Yet, as temporarily inspiring as he might have been, his keynote speech last October at the Bund Financial Summit was a cataclysmic error given the ensuing plunge in Alibaba’s stock price. The 20-minute speech spent lambasting the Chinese financial sectors (whose regulations he deemed anachronistic and restrictive) has led to a more than 30% decrease in share prices. Moreover, on November 3, Ant Group’s initial public offering (IPO) was suddenly halted less than 48 hours before its scheduled listing on the Shanghai and Hong Kong stock exchanges, which at $37 billion would have made it the largest IPO in history. While Chinese regulators may be justified (and are certainly not unique) in their desire to curtail the technology sector’s rapidly increasing influence, the abruptness of the move and Ma’s disappearance from the public sphere also represents a punitive response to his blunt criticism of the state.

At first glance, it seems incomprehensible why the state government halted an IPO that would have raised Ant Group’s estimated worth to $359 billion, slightly more than JP Morgan, the world’s largest bank. The decision to list the world’s largest public offering in Shanghai and Hong Kong—but not in New York—was supposed to signify a crucial decoupling from the American capital market and the company itself, which offers loans and services to lower-income citizens with less collateral, was regarded as convenient and accessible. Everything was in place for state news to propagandize the success story. While Ma’s critiques at the Bund Summit were certainly scathing (he had called the financial sector an “old people’s club” and accused Chinese banks of having a technologically illiterate “pawnshop mentality”), few onlookers expected such a radical response. In the week or so between Ma’s speech at the summit and the official announcement to postpone Ant’s IPO, Alibaba’s share prices remained steady. Although decrying Chinese authoritarianism is often tempting, let us first consider some other potential options for the regulators’ sudden response. 

One could reasonably make the argument that concerns over Ant’s business structure were legitimately urgent enough to halt its IPO and warrant a more detailed investigation. News of the IPO generated massive consumer interest, and roughly $2.8 trillion worth of shares were ordered just from retail (non-professional) investors alone, exceeding the shares on offer by over 870 times. In other words, a market bubble would have formed. In the Chinese market, this phenomenon is relatively common; Chinese semiconductor producer SMIC’s share prices tripled in value on the first day of trading this July, but by September had shed over 60% of its share price. A similar situation for Ant would have spelled disaster for retail investors around the country, especially since investors often rely on high leverage to bid for shares. In advance of the expected IPO, some brokers offered up to 95% leverage, meaning 95% of the bid would be financed as margin loans. It is not hard to see the risk this posed. 

Moreover, there exists a pressing issue about Ant’s business model. Although Ant Group has many platforms, a large chunk of its business revolves around offering loans to small consumers and businesses. The loans are then underwritten by other banks, who purchase the debt security (and therefore bear the losses if the consumer fails to repay the loan) in return for interest payments. In the process, Ant essentially acts as an intermediary—and in doing so, incur minimal risk. In fact, The Wall Street Journal reports that of the $312 billion in outstanding loans made through Ant’s platform at the end of last June, a mere 2% were funded with Ant Group’s own capital. The rest were backed by traditional banks and securities, who rely on Ant’s automated analytics to determine whether to give applicants the loan. This reliance is dangerous because Ant Group itself has little short-term motivation to ensure the quality of the loans it grants. Although, in this case, the tenor is generally shorter and the size of the loan smaller, the process brings to mind the 2008 subprime mortgage crisis that led to an economic recession. 

Nevertheless, the move is likely to be at least in part politically motivated—all regulatory bodies had approved Ant Group’s IPO by mid-October last year. More concerningly, the typically flamboyant Jack Ma has not been seen since the Bund summit, fanning speculations about his disappearance when he did not show up for a scheduled appearance on a TV show he created. China has a history of punishing dissenting businessmen: several high-profile business tycoons such as Xiao Jianhua, Guo Guangchang, and Ren Zhiqiang have been detained or sentenced for various transgressions. For example, Ren was sentenced to 18 years in prison after publicly criticizing the party’s response to the Covid-19 pandemic. Although it is pointless to speculate about his three-month-long disappearance, he would be far from the only individual to receive such treatment.

It is unclear how long Ant Group will take to recover from the halted IPO. Its valuation has been slashed by almost half, and a new bill proposed in November would force Ant to finance 30% of the loans it offers. By contrast, the Dodd-Frank Act enacted in the wake of the 2008 recession only mandates a 5% capital requirement. If passed, this would massively reduce Ant Group’s profitability and transform it from a technology company offering financial services, which it has repeatedly branded itself as, to a traditional bank with more stringent reserve requirements. 

Cowed by regulators, Ant Group reported on January 15 that it would establish a working group to develop a “rectification programme” in order to meet targets set by state officials. While it promised to ensure that its operations and services will remain fully functional throughout the process, major changes seem imminent for the company’s internal structure. Most crucially for the company, state spokesmen announced that some of Ant Group’s many business branches would need to be regulated as financial institutions rather than as technology platforms, which subjects them to extra scrutiny. This bodes ill for the company, as this means that the aforementioned law regarding loan financing will also likely pass—Chinese judicial processes often take place behind closed doors. Moreover, the government also announced plans to curtail the influence of other consumer finance companies. In the coming months, spokesmen declared, other financial technology companies will be evaluated and may face penalties ranging from verbal disapproval to nationalization. 

The implications of Jack Ma’s twenty-minute speech are far from over.