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(December 29): The rare activist moment starring China’s central bank was too late and too crude.
For years, when it came to innovative business ideas, Beijing’s stance has been to let them flourish: there would always be room to regulate and control things later. And so the superstars of the concert economy flourished. The Chinese version of Uber Technologies Inc., DoorDash Inc., and PayPal Holdings Inc. are even more ubiquitous than their American counterparts at home.
The other side of the coin is that billions of dollars of paper can be obtained and destroyed thanks to regulatory vagaries. Here, Jack Ma’s Ant Group Co. is a warning.
On Sunday, China’s central bank issued a statement saying Ant has “little legal conscience,” “disregards” compliance requirements from regulators and engages in antitrust behavior. Ant needs to get back to its core payments business, the People’s Bank of China said.
In the first two days of operations since then, Alibaba Group Holding Ltd., which owns about a third of Ant, lost more than 15% of its market value. Even before the People’s Bank of China interference in Ant’s business models on Sunday, Alibaba shares were hit on Christmas Eve by a terse announcement of a line from Beijing about investigating the company’s antitrust behavior on Christmas Eve. Hong Kong-listed Alibaba shares are entering by year-end just 1.4% from being in the red.
That’s one more blow for Ma, whose blunt words, comparing China’s financial system to pawn shops, cost him the world’s largest initial public offering in early November. Ant had been on track to raise $ 35 billion, with a valuation of more than $ 300 billion, until regulators pulled it two days before its commercial debut.
The company’s digital payments business has become a commodity. The newest and fastest growing consumer loan operation, which the PBOC now seeks to limit, is Ant’s high-margin revenue stream. So even if the company can somehow win back favor with Beijing and seek to return going public, your valuation will be questioned. Ant will no longer be China’s MasterCard, but simply your PayPal, which has a lower market value.
As a long-time observer of Ant, I have often marveled that it ventured into becoming a public company, because it operates in such treacherous regulatory waters. In July, my colleague Anjani Trivedi and I wrote that its IPO would risk exposing how volatile and unstable China’s financial regulations can be. A blockbuster chart seemed too good to be true.
This isn’t the first time Ant has faced regulators. The People’s Bank of China noticed its flawed lending model as early as 2017. At the time, Ant was packaging consumer loans into asset-backed securities and selling them to institutional investors, often banks. The central bank, concerned about the underlying quality of the securitized products, which had collapsed Lehman Brothers Holdings Inc., stopped that practice.
So Ant found another way to develop his business.
Today, Ant connects banks with consumers, and almost all of the loans it originates are found only on bank balance sheets. Given that China is one of the most indebted nations in the world (its debt-to-GDP ratio is approaching 300%), the People’s Bank of China is justifiably concerned about bad loans. By asking Ant to put in a capital cushion, as Sunday’s statement implies, the central bank is essentially telling Ma not to get too smart.
But why is the PBOC making this public statement now? If he had only issued a vaguely worded warning three months earlier, investors and bankers would not have sparked such a frenzy over Ant’s IPO and would have been disappointed.
The fact is, the PBOC sees problems, but often lacks the political capital to do something about it.
Consider the backdrop. Ant first sought a double listing in July, when China’s tech stocks were experiencing a bull run, even as the economy struggled to recover from the Covid-19 lockdown. Back then, Beijing was accelerating unicorn IPOs, hoping that a tech infrastructure could spur growth. Of course, the People’s Bank of China pulled out of open market operations as early as June, concerned that earlier rounds of easing would stimulate speculative bubbles, but bureaucrats held their tongue on Ant. President Xi Jinping did not want to hear about it. risk control at that time.
Fast forward to December. China’s economy has recovered and debt reduction is once again at the top of Beijing’s economic agenda. Xi, 67, who is practically president for life, has always wanted to deleverage China, because he does not want a Minsky Moment to explode during his lifetime. It began that campaign in late 2017, around the time the People’s Bank of China halted Ant’s securitization of its microloans, but was derailed by Donald Trump’s trade war and Covid-19. Now that both obstacles are gone, PBOC risk managers have found their voice.
Of course, it should come as no surprise that China’s central bank lacks independence. But that trait is important to global investors, who have piled up in China this year because it is the only major economy growing in the era of the pandemic. Ant is a good reminder that Beijing politics matters. A loosely worded statement after years of inaction can wipe out billions of dollars in the blink of an eye. The Ma fiasco has turned into a sham, just as ESG investing took a turn and became a major trend this year. For all the big investment houses rushing into China, maybe it’s time to step back and ask yourself: is the country really ready for the global stage?
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