Chinese billionaire and co-founder of Alibaba Group, Jack Ma, was handed a massive defeat when the world’s largest public share sale which was expected to take place by Ant Group, the financial arm of e-commerce giant Alibaba, was suspended by the Chinese State authorities.
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China’s President Xi Jinping personally ordered to suspend the $37 billion Initial Public Offer (IPO), reported Wall Street Journal citing Chinese officials with the knowledge of the matter.
Reportedly, the decision to suspend the IPO came after Ma gave a speech at the Bund financial forum in Shanghai a few days after Ant Group received the approval for listing. In his speech, Ma took shots at the Chinese banking system and the Basel financial regulatory system, an international supervisory and regulatory banking framework.
“Basel is more like a seniors’ club … about solving the problem of an aging financial system that has been operating for decades… But the problem in China is the opposite… Its risk is actually a lack of financial system,” he said.
“The essence of finance is credit management. We must change the pawnshop mentality of today’s finance and rely on the development of a credit-based system. Today’s banks continue to have a pawnshop mentality. Collaterals and warranties are pawnshops.”
At the conference, Chinese Vice President Wang Qishan who was also the keynote speaker echoed a more reserved sentiment with respect to China’s banking system saying that China will “keep away from the wrongful paths of excessive speculation, self-reinforcing cycles of financial bubbles and Ponzi schemes.”
Days after the conference, Ant’s IPO, which earlier got approved by the regulator was stopped, reportedly on Jinping’s order. Analysts see the move as a clash between the Chinese Communist Party (CCP) and China’s billionaire who became too powerful.
The Hong Kong and Shanghai Stock Exchange, where the listing was supposed to take place, announced the suspension after they summoned the company’s leadership for “supervisory interviews by relevant departments”.
Ant Group has “significant issues such as the changes in financial technology regulatory environment,” said the stock exchange in a statement. “These issues may result in your company not meeting the conditions for listing or meeting the information disclosure requirements.”
The dual listing that was planned for Shanghai and Hong Kong stock exchange was expected to raise $34.5 billion, the largest IPO, surpassing Saudi Arabi’s Aramco IPO that raised over $29 billion.
The suspension resulted in a loss of about $3 billion to Ma, who holds 4.2% of Alibaba, which is the owner of about one-third of Ant’s Group, reported Bloomberg.
“This deal was not only cleared for take-off, the wheels were literally off the ground,” Drew Bernstein, the co-managing partner at Marcum Bernstein & Pinchuk, which advises Chinese companies, told BBC.
“The company’s going to have to restructure somewhat. Maybe commit some more capital to the loan division, apply for more licenses. Then they’ll be able to come back to the market,” he added.
While analysts believe that Jingping’s serious muscle-flexing against the second richest man of China is a deliberate move to show any financial opening should toe the party line.
“The party is flexing its muscle,” Victor Shih, associate professor at UC San Diego and author of “Factions and Finance in China: Elite Conflict and Inflation,” told Bloomberg. “It’s saying to Jack Ma, you are going to have the biggest IPO in the world, but that’s not a big deal for the CCP, which oversees the world’s second-largest economy.”
However, some analysts also believe that the move was correct even if the timing was wrong. According to Bloomberg, the Chinese regulators said Ant’s business model effectively allowed it to charge higher fees for transactions while state-run banks took on most of the risk.
“At the same time Ant sought to list, authorities were racing to develop rules that would subject financial holding companies to higher capital requirements.”
While Jinping and his party have managed to crush what could have the largest IPO, it raises questions about the viability of listing in China for the investors who are not willing to toe the party line. It is clear that in case of a clash, the CCP will always prevail.