Why Ant halted its IPO

Most people would have know by now that Ant Financial has temporarily halted its progress to list in Shanghai and Hong Kong.

It raised a lot of questions among investors…

Did Ant do something wrong? Is it a fraud?

Is the government thinking of curtailing the rising power of Ant?

How would it affect other financial stocks?

Would this incident crash the China market?

Would investors lose trust in China?

But we all know that information is going to be scarce, especially when it involves the government.

I provide my analysis of the situation in this case.

Ant was born ‘illegally’

I covered the birth and rise of Ant Financial here. Long story short, online payment was non-existent in China and Jack Ma needed the function for consumers to transact money and goods to compete against eBay. An escrow solution (withholding the money and only release after the goods have been received) was key to increasing the confidence between buyer and seller, and to make transactions happen.

So Jack Ma decided to invent it himself. That was in 2003 and it was a risky move because:

• Alibaba wasn’t a financial institution and didn’t have a license to operate payment services
• Yahoo! and Softbank were foreign shareholders in Alibaba which makes getting the license even more difficult

But Jack Ma went ahead and created Alipay (predecessor of Ant Financial) outside of Alibaba.

Jack Ma said, “if someone has to go to jail, I’ll go.“

Alipay received license in 2011, which was 8 years after it was introduced.

The government didn’t prosecute Jack Ma. It could if it wanted but it didn’t. And this says a lot – the government was quite flexible and recognized innovation.

Jack Ma also made good with Alibaba shareholders by granting Alibaba 33% stake in Ant Financial.

It was a high risk maneuver and I believe Jack Ma could really have gone to jail if Alipay didn’t succeed. Hats off to his courage.

Most importantly, the government allowed Ant Financial to continue to operate and prosper. I do not think that it wants Ant dead.

Lukewarm relationship between Jack Ma and the government

The government in China wields a lot of power and it is necessary to pledge loyalty to it if you want to run a successful business in China. Jack Ma is a member of Communist Party of China (CPC).

Otherwise, you might suffer the fate like these entrepreneurs as described in Penn Political Review,

Outspoken private entrepreneurs in China often face investigation and charges from the CPC. Huang Guangyu, chairman of the largest consumer electronics retailer in China GOME Group, had a net worth of $1.25 billion but was sentenced in 2008 to 14 years in prison after charges of alleged stock market manipulation. Mou Qizhong, the once business tycoon and the “model of the new Chinese capitalist in the early 1990’s,” was released from jail in 2016 after serving a 16 year sentence. Chu Shijian, the “tobacco king” in China who passed away on March 6, 2019, had been one of the most controversial entrepreneurs in contemporary Chinese history. He turned Yuxi Tobacco Company, a small, local tobacco factory, into a national giant in the 1980s and 1990s. When he was condemned to life imprisonment for embezzlement in his seventies, he received sympathy from many. His wife and only daughter were also put in prison, and his daughter died soon afterwards in jail. In early 2002, he was released on medical parole and started managing 134 hectares of orange farmland.

No exception for Jack Ma. He has on several occasions showed his loyalty to CPC in public by saying things like, “if the country needs, AliPay can be given away to the state at any time.“

But other comments revealed the lukewarm relationship between him and CPC. An example, “as always, be in love with them (referring to the government), but don’t marry them.“

All we can say is that Jack Ma balances the need for disruption and obedience very well, a culmination of the Tao philosophy in his action.

The government has not arrested Jack Ma for all these years and hence I don’t think they are going to do it now either.

Ant has systemic consequences

Ant has become a behemoth. Although it has always seen itself as a tech company, its products and services rivalled that of the financial institutions.

It has always been a headache for regulators to figure out how to regulate these tech companies. On one hand, you don’t want to be too strict and stifle innovation. On the other, you do not want to let the problems get out of hand which could lead to a negative impact affecting many people.

I think Ant belongs to the latter and hence the authorities have summoned Jack Ma and his team to discuss about the changes in the fintech regulations.

A journalist in Bloomberg speculated that it could be the criticisms Jack made on the financial system during a high profile financial forum that cost him the IPO. He said banks were like ‘pawn shops’.

We must remember that many companies in China are owned by the state and that included many big banks. Ant is trying to take away the pie and Jack has been smirk about it. The Chinese values the ‘face’ a lot and it is often not acceptable when you rub it in while you are winning.

Hence I think there are two likely reasons why Ant IPO was temporarily halted.

One, Ant is having too much impact on China and regulations are needed to minimize or even limit possible disastrous effects if anything goes wrong. Updating the regulatory framework is necessary and it could mean that Ant may not comply with some of these new rules and need some time to adapt.

Second, Jack Ma pissed off the authorities and caused them to lose ‘face’. The authorities wanted to show who’s the boss, not only to Jack or Ant, but to the rest of the world.

Given the fight for world supremacy, I don’t think the government wants to kill Ant. It is a national pride that Ant is the largest IPO in history and the most successful fintech company in the world. But innovation has to be threaded with care when the consequences are huge and ‘face’ must be preserved at all times.

Regardless, nobody truly knows what transpired and we can only speculate. But I believe Ant IPO will be back in no time.