China: why Ant Group’s failed IPO is good news
This column was previously published in Les Echos, on 7th December 2020.
The Ant Group’s IPO, to be launched on the Hong Kong and Shanghai stock markets at the same time, would have been historic from more than one point of view. Apart from its unrivalled size — set to raise $35 billion — it would, for the first time, have given the blessing to the appearance of a Chinese new entrant with a market capitalisation greater than the largest existing Western player, the American JPMorgan. It would have sent a message to the West that China, after having been the world’s factory and its R&D center, was now aiming at becoming its butler as well, thanks to the digital makeover of its service industries — today finance, tomorrow healthcare and education.
The Western press saw this last-minute halt to the process merely as a vengeful move by the Communist Party against Jack Ma, and against private Chinese entrepreneurs in general. However, deeper analysis causes one to think that this intervention — even though the way in which it was done raises concerns, as is so often the case in China — should be seen by international investors rather as a positive signal.
Illustration by Derek Zheng for SupChina
Firstly, because the Chinese financial regulator saw Ant’s business model as one which would be unsustainable over time and took preventative measures. Ant Group made most of its profits from usury — consumer loans at excessive interest rates — and only kept 2% of the risks on balance sheet. This pattern was a reminder of the subprimes of the 2000s, and even more so since it was based on the highly weakened balance sheets of Chinese regional banks, likely to present a systemic risk over time.
Secondly, because the valuation retained — initially $230 billion, revised to $330 billion a week before the launch, and even expected to reach $500 billion as from the first day — led to a societal risk, since small savers, as usual, would have been the first victims of this irrational over-valuation. In this way, the Chinese regulatory authority showed that it was different from its Western counterparts, by taking account of valuations in its decisions, notably in its constant concern for keeping social peace, already shown in its intervention in the summer of 2015.
Beijing took a pre-emptive measure when it saw that the business model would be unsustainable over time
Lastly, because the Ant Group’s management’s display of intolerable arrogance during the roadshow — brushing aside investors’ questions on future financial management and insulting world regulators along the way — exposed the dangers of the “winner takes all” business model of the digital revolution, as displayed daily by the GAFA in the West.
The good news for investors is that, in the coming months, it seems likely that they will have the opportunity to invest in an Ant Group with a more solid business model and a significantly lower valuation. Therefore, this matter should be seen as a positive signal — contrary to the way it has been perceived in the West — that, in 2021, should encourage all investment committees to reconsider their China underweight position in their global portfolios, for it accounts for only 3% on average, whereas it represents 15% of global GDP and a good third of worldwide growth.
Ant’s greatest mistake in 2020 has been to be too much of a lender. The greatest mistake of a global investor in 2021 would be to be too fearful with regard to the new Chinese digital leaders who are reshaping, on a global scale, not only our industries but also a good number of our services.