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The speech that scuppered the world’s largest IPO

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Yesterday the Chinese government suspended Ant Group’s listing on the Shanghai Stock Exchange. It had planned to raise $34.4 billion at a market valuation of around $300 billion. There are potentially several reasons for the Chinese government to be uncomfortable with Ant Group’s IPO. But the big question is why did it let it get so far and then pull the plug. A distinct possibility is that a speech by Ant founder Jack Ma at the Shanghai Bund Conference on the 24th of October was a step too far. 

It was a great speech, if somewhat controversial. It ultimately was an impassioned plea for radical global reform. It was also critical of a digital currency created by a research institution rather than the market. And although Ma made no direct reference to the digital yuan, it was clearly created by a research institution. And from the speech, one has to wonder whether Ant was considering its own digital currency (see later).

While the talk was understandably biased, it also might have stated some uncomfortable truths. Ma was more critical of the Bank for International Settlements (BIS) than China. And likened today’s banks to pawnshops, and pretty much said China’s banks are outdated. He criticized concerns over systemic risks saying that China lacks the ‘system’ in systemic. Ma said the Basel Agreement targets the disease of the elderly, Alzheimer’s specifically, and referred to Europe as the elderly. We’ll come back to the speech, but first let’s explore China’s concerns about the IPO.

Chinese government’s discomfort with Ant is not new

Shortly after Ant’s IPO plans were first announced in July, we reported on two unverified government moves that signaled unease with the IPO. The first was an investigation into delinquency rates with Ant Borrowing and Ant Huabei. Ant provides the distribution platform for loans and performs the risk assessment, but banks take on the risk, so the concern was that Ant may be passing on too much risk to banks. The second was a rumored antitrust investigation into Alipay and its competitor WeChat Pay which together control more than 90% of mobile payments.

Both of these are more than just excuses. Ant is leveraging its leading market position in mobile payments into other major financial sectors such as investments, insurance and lending. Loans now account for 39% of revenues. 

The Chinese central bank has been forthright that one of the primary drivers behind the digital yuan or eCNY is that it’s not comfortable with the core payment infrastructure being controlled by private institutions.

And concerns over lending is a throwback to the P2P lending space, which boomed in China but also featured numerous Ponzi schemes. Others used aggressive debt collection tactics. Following a crackdown by Chinese authorities, the number of lenders declined from 5,000 at its peak to just six. Ultimately P2P resulted in investor losses of 800 billion yuan ($120 billion). 

Outside of P2P lending, China has just released a draft of new rules and this was deemed likely to impact Ant’s operations. And given the planned new rules there may have been a risk of future investor losses for Ant shareholders. While strategic investors took up the bulk of the Shanghai listing, the rest was heavily oversubscribed. Individual investors were willing to invest the equivalent of $2.8 trillion. So if the IPO had proceeded, the stock price might have rocketed.

But ultimately, that speech may have been the last straw.

Jack Ma’s speech: Europe, Alzheimer’s and banks

Ma’s speech was full of metaphors. He argued passionately for innovation not to be stifled by risk aversion. He asserted that today’s financial system focuses on large businesses or the 20% that solve 80% of the problems. As always, Ma’s interest is in the other 80%, small businesses and empowering younger people.

“The Basel Accord is more like a club for the elderly. It wants to solve the problem of the aging financial system that has been in operation for decades. The aging system in Europe is extremely complicated. But China’s problem is just the opposite. It is not a systemic financial risk, because China’s finance basically has no system, and China actually has a risk of ‘lack of a financial system'”.

Ma continued: “China’s finance is the same as other developing countries that have just grown up. In the financial sector, we are young people, and there is no mature ecosystem or complete flow. There are many big banks in China, which are more like big rivers and arteries of blood. But today, we need lakes, ponds, streams and rivers, and various marshes. Without these ecosystems, when there are floods, they die, and when they is drought, they perish. Therefore, our country today lacks the risks of a healthy financial system. What we need is to build a healthy financial system, not financial systemic risks.”

And he went on to juxtapose the Basel Accord as a treatment for Alzheimer’s. 

Then he moved on to talk about supervision. “Good innovations are not afraid of supervision, but they are afraid of using yesterday’s methodology to manage the airport. We cannot manage the airport with the same method of managing railway stations, and we cannot use the methods of yesterday to manage the future.”

He continued: “The future of competition is an innovative competition, not just a competition of supervision skill.”

Ma likened the current banking system to ‘mortgage pawnshop thinking’. “We must use today’s technological capabilities and a credit system based on big data to replace pawnshop thinking,” he said.

Innovation and digital currency

Jack Ma observed that it’s understandable for regulations to lag innovations. But he’s concerned that the gap is getting too wide. “When innovation is far ahead of the regulation, when the richness and depth of innovation far exceed the imagination of regulation, it is abnormal and society and the world will fall into chaos,” he said.

And below is the full speech excerpt about digital currency:

“Take digital currency as an example. If the financial system the world needs in 30 years time is built with a future perspective, digital currency may be a very important core. Today’s finance does not need digital currency, but it will be needed tomorrow, in the future, and thousands of developing countries and young people will need it. We should ask ourselves, what practical problems should digital currency solve in the future?”

“The digital currency in ten years time and today’s digital currency may not be the same thing at all. This digital currency should not be based on history, not from a regulatory perspective, not from a research institution, but from the market. To find from demand, to find from the future. This matter is of great importance. Our research institution should not be a policy institution. Policy institutions cannot rely solely on their own research institutions.” 

“Because the digital currency system is a technical problem, it is not only a technical problem, but also a solution to future problems. Digital currency may redefine currency. Although the main function of currency is still there, it will definitely redefine currency.” 

“Like Apple’s mobile phone, which has redefined the mobile phone, making a call is only one of its functions. Digital currency today is far from the time for establishing standards, it is the time to create value. It is necessary to think about how to use digital currency to establish a new financial system, think about the future for the world, think about how to do global trade, and think about the world. There should be a digital currency built on the basis of technology that can withstand the test of time. If it is to truly solve the problems of sustainable, green and inclusive world trade.”

While some might say this speech cost $34 billion, the reality is Ant is the same company as the start of the week. The big question is whether new legislation will hamper its expansion.