Tech: Behind the implosion of Ant Groups mega IPO

By Assif Shameen

This article first appeared in The Edge Malaysia Weekly, on November 9, 2020 - November 15, 2020

IT was supposed to have been the biggest-ever initial public offering in history. The listing of Ant Group the payments affiliate of Chinese e-commerce giant Alibaba Group Holding Ltd soaked up more than US$3 trillion (RM12.46 trillion), with its Shanghai retail offering a whopping 870 times oversubscribed and the Hong Kong portion 389 times oversubscribed.

Ant was set to raise US$34.4 billion in the IPO, at a valuation of US$313 billion. But just 36 hours before the ceremonial gong at the Hong Kong Stock Exchange was set to be banged for what would have been a record-setting listing, Beijing abruptly pulled the rug from underneath it.

The suspension of the mega listing came just 10 days after Jack Ma gave a bluntly worded speech at the Bund Summit in Shanghai, lashing out at old-fashioned financial regulations that he claimed hampered financial innovation. Alibabas founder noted that the Basel Accords a set of internationally agreed banking supervision regulations were a club for the elderly that should not apply to Chinas banks or its financial technology (fintech) players because the country does not have a mature financial ecosystem yet.

Self-effacing Ma, who has called himself an amateur in finance, argued that Chinas financial sector was overly regulated and needed more breathing room. The tech entrepreneur and Chinas richest man told the gathering that the worlds second largest nation had inertia in its thinking.

Innovators must make mistakes, said Ma. There are just too many documents that regulate what people can and cannot do in China with their money. We cannot use the method for managing a railway station to manage an airport. We cannot regulate the future with yesterdays methods, he declared.

Indeed, Mas speech followed one by Wang, who warned that there should be a balance between financial innovation and regulation. Safety is always a top priority for financial regulation, President Xis close confidant intoned.

Days later, Ma and Ant Groups top executives were summoned by regulators, including the central bank and China Banking and Insurance Regulatory Commission (CBIRC), for a joint supervisory interview in Beijing, where they were rebuked for Mas scathing remarks about the financial system and regulations. The next day, with the clock ticking away at Ants mega listing, the Shanghai and Hong Kong exchanges pulled the plug on the IPO, saying that the listing was being suspended because Ant may not be able to meet listing qualifications due to significant regulatory changes in the countrys fintech industry.

The reaction from the markets was swift. Shares of dual Hong Kong- and US-listed Alibaba, which owns a 33% stake in Ant, at one point plummeted by as much as 9.7% in New York to US$280.78 before stabilising at 8% below the previous days close. Newly listed Lufax, an online financial services platform and an affiliate of Ping An Insurance, plunged 13% or below its IPO price just four days earlier.

Whats behind Beijings change of heart on Ant? Why were Chinas regulators punishing a national champion that was about to do a world-beating IPO? In many ways, the writing had been on the wall for months. In July, Chinas central bank asked the countrys antitrust agency to launch an investigation into Ants Alipay payment platform, as well as rival Tencent Holdings Ltds WeChat payment platform. In the weeks before Ants listing, Chinese state media as well as regulators had dropped broad hints of more stringent regulations on micro-lending. Moreover, in the past, Beijing made no secret of its desire to prevent an impending credit bubble and made it clear that it viewed large unregulated entities, presumably including Ant, with suspicion.

On Nov 2, regulators proposed new rules to limit the amount of money that online lenders such as Ant can provide. The rules also require fintech loan facilitators like Ant to take some of the risk in the loan origination process rather than outsourcing all of it to partner banks. The new rules cap the loan size at RMB300,000 (RM187,630) and require at least 30% contribution from fintech firms in co-lending from the current 1% to 20%, thereby significantly lifting capital requirements.

Until now, if Ant were lending RMB100,000 to a young office worker in Beijing, it could put up just 1% of the total loan and ask its co-lender or partner bank to fund the rest. Now, the rules require fintech firms such as Ant to fund at least 30% of the loan. The new rules also restrict fintech players from lending more than one-third of individual borrowers annual salary.

Chinese regulators have been looking at fintech companies role in lending as they get a pass on taking credit risk while facilitating borrowing, says Brendan Ahern, chief investment officer at New York-based exchange-traded fund provider KraneShares. He believes Beijing regulators dont want an unregulated fintech player like Ant providing households with unlimited credit growth. Helping households and small businesses garner access is a good thing, but the regulator is waving a yellow flag on a credit highway without toll booths, he says.

Moreover, he argues, If Ant takes it on the balance sheet, it is in fact more profitable even with more credit risks on its books. The only problem with the new rules, he says, is that it moves Ant away from the asset-light, distribution-only model that goes well with tech valuations to one in which Ant will resemble a bank.

But even then, the Bernstein analyst notes, Ant will have much lower compliance and capital requirements. Though such regulations could be more onerous on traditionally asset-light players such as Ant, Kwek notes that as regulators put in more bank-like restrictions on fintech players, they are also likely to allow bank-like benefits, including the ability to raise deposit funding. Overall, the new rules on lending will have some impact on Ant but it is not dramatic, he says.

Source: The Edge Market, 2020

Required:

1. Critically assess the ethical implications of an organisations culture that is primarily driven by profit, and its implications for risk management, based on the excerpt of the article above. Cite examples where necessary. (450 words)

2. In your opinion explain whether and how such a profit-driven culture can be changed to promote ethical behaviour. (450 words)