Many recognized the historic significance of the Ant Group IPO when it was announced last year. Not only was the IPO going to be the biggest one ever, around $313 billion, but the successful listing of the company would have meant that the world’s five largest IPOs would all have been Chinese companies. For some perspective, the staggering price tag of the $313 billion pre-offering valuation would have made Ant Group worth more than every single bank in the world except two: JPMorgan Chase and BofA (Calhoun 2020). While there are many reasons for the mammoth influence of Chinese companies, such as the large Chinese population, Ant Group’s story serves as a great anecdote for how and why these giants rise and fall. 

But what is Ant Group? Ant Group is an affiliate company of the Chinese Alibaba Group and one the world’s largest FinTech companies. To be more specific, Ant Group’s Alipay acts as Alibaba’s mobile payment service. In the first 6 months of last year, it handled more than $17 trillion (USD) in payments, which is more than PayPal during that same period (Laio 2020). Just this fact alone is enough to explain Ant Group’s enormous influence and the sizable customer base that employ their services. 

However, the real value of Ant Group’s FinTech services has now far transcended just processing payments. Alipay, for example, can be used to make payments, shop with credit (without a credit card), take out small loans, invest, and even buy insurance (Sorkin 2020). The versatility of the mobile payment service is really what makes the company so valuable and what made investors so excited. To that very point, Ant Group has seen incredible growth over the past few years. In 2018, the company was worth $150 billion; those that would have invested in the company at that price would have gained approximately 84% at the IPO price proposed last November (Xie 2020). 

It would be misleading to not mention that Ant Group does in fact have other competitors that offer similar integrated FinTech services. Companies like Tencent’s WeChat Pay and QQ Wallet have managed to capture 40% of market share of the Chinese mobile payments market combined. However, as of October 2020, Ant Group has still managed to maintain 55% of the Chinese mobile payments market.

This all sounds pretty great so far. Unfortunately, the towering ant hill had Xi Jinping’s boot coming for it.

Ant Group’s IPO was scheduled to go public on the Hong Kong and Shanghai exchanges on November 5, 2020 (Zhong 2020). But, just two days before the IPO, the listing was opposed by the Chinese government due to concerns related to the consumer risk from Alipay’s loaning system. This move was a surprise to many investors since the Chinese government had been pretty lax about cracking down on Ant Group; in 2018, when Ant Group was criticized for their data privacy practices, the CCP simply recommended some changes and failed to offer any additional repercussions or significant oversight. 

One thing that has changed since 2018 is Ant Group’s increasingly pervasive influence over Chinese markets and consumers. With shifting stakes and growing influence of companies like Ant Group over financial systems, the attitude of the Chinese government was bound to also shift.

The best way to explain this is that Ant Group failed for the same reasons the business model could never exist in the United States: Ant Group simply had too much (unregulated) influence over the Chinese economy.

Just like in the 2008 financial crisis, when financial institutions had too much leeway with how and where they allocated their money, there are bound to be drastic implications of any failures. The Chinese government believes that proactively stopping the listing of Ant Group is one of the first steps to better regulate their economy. 

The other more humorous interpretation of why the Chinese government took this step revolves around Jack Ma, the former executive chairman of Alibaba Group. He criticized China’s intense regulatory regime a few days before the IPO was halted, so the Chinese government could also have seen this as an opportunity to ensure someone with Ma’s influence couldn’t criticize the government without facing repercussions. While this scuffle might have been the catalyst for China’s actions, there were certainly other legitimate concerns that were used to halt the IPO (CNBC Writers 2021).  

To understand this, let’s focus on the business segment that earned Ant Group the most criticism, their loaning services. The loaning business has been very lucrative for Ant Group, contributing 41.9 billion yuan ($6.4 billion) to their bottom line. That is about 34.7% to their annual revenue of last year. Ant Group worked with 100 banks to give out consumer and small business loans upwards of $250 billion and $58 respectively (Leng & Zhu 2020). These expansive services did not come without risk, unfortunately. Many experts criticized that the speed and ease of taking out loans through Ant Group left potential systemic risks and uncertainty, especially if the process was not properly regulated (Zhong 2020).

In the end, Ant Group’s loaning system was a scapegoat for the Chinese government’s shutting down of the IPO, regardless of if Ant Group’s practices were more or less risky than that of its competitors. By saying this though, I do not mean to diminish the importance of the criticism and the questions raised by the failed IPO. Rather, this just goes to show that the Chinese government did have a greater political reason for halting the IPO. There were two enormous shifts in attitude the Chinese government signaled with this decision: a willingness to regulate large, influential companies and a renewed fervor for antitrust practices.

First, the Chinese government has made a firm statement that they will prioritize the health of their financial system over the well-being of particular companies, even if these companies do have a lot of influence like Ant Group. In a move particularly endemic of this alignment, the Chinese government ended up proposing changes to better manage risk in it’s financial services system after halting the IPO; some of these changes included setting maximum online loan amounts, establishing high capital thresholds for online microloan lenders, and even a new requirement that more funding has to originate directly from companies like Ant, instead of from outside sources. Undeniably, regulating this system will certainly help with the future stability of Chinese financial markets, especially when Ant Group has so much influence. These measures will probably serve to reduce the risk of default as well as the lessen the amount of money everyday Chinese customers can lose.

The last part of their new guidelines is particularly significant since it means companies like Ant will need to expend more free capital for each loan, thus limiting the amount of loans that can be given out. These regulations apply broadly to all companies like Ant Group in China and may threaten the lofty financial valuations driving investor sentiment. 

The second shift is that the Chinese government has shown a new side of its future priorities, a side that is more vigilant in relation to anti-competitive practices. This is truly the first time the Chinese government has decided to directly tackle anti-competitive behavior in the internet sector and may fundamentally change the landscape for technology and internet companies. This position is, again, quite uncharacteristic of the Chinese government. Not only has China historically had a record of being more lax on anti-competitive behavior, but many parts of their economy are practically oligopolies. While Amazon gets enormous criticism for strangling small businesses, it still only amounts to roughly 5% of total retail sales in the US; Alibaba sells almost 20% of all Chinese consumer goods (Chon 2021). This trend of big businesses dominating Chinese markets extends to e-commerce, delivery services, food delivery platforms, ride-hailing services, and payment services in China. Everywhere you look there are many big winners leading the market while crushing their competition. 

More specifically, the halt of the Ant Group IPO is tied to a bigger set of guidelines proposed by the China’s State Administration for Market Regulation (SAMR) last year. The main goal of these guidelines is to prevent certain platforms from dominating the market or from adopting methods aimed at blocking fair competition (Cheng & Zhu 2020). As such, new rules aim to stop predatory pricing and price discrimination based on user data, halt the practice of forcing online sellers to sell exclusively on one platform, and establish a review system to ensure these companies don’t abuse their market position. It may be easy to believe that these new regulations are more bark than bite, but China has already fined Alibaba 2.78B USD (4% of 2019 sales) under this new set of rules (Lyons 2021). There are rumors that Tencent’s moves to acquire Sogou, China’s 3rd largest search engine, might be the next target. 

Overall, Ant Group has shown us that the growing influence of these companies is now subject to more criticism and regulation, all in an effort to better protect Chinese customers. And with the topple of Ant Group, it is time to start questioning the infallibility of China’s large, monopolistic companies. For many years these companies have gone undeterred, gaining market share and consumer favor. Perhaps companies that were considered “too big to fail” in China should be more cautious of the very real threats presented by a more activist government, especially now that it has stomped on one of the biggest financial players in the country.

References

“ANT Group IPO Compromise Shows That Foreign Investment in China Will Only Go so Far.” Atlantic Council, 4 Feb. 2021, www.atlanticcouncil.org/blogs/econographics/ant-group-ipo-compromise-shows-that-foreign-investment-in-china-will-only-go-so-far 

Calhoun, George. 2020. “Why China Stopped The Ant Group's IPO (Part 2): Ant's Dangerous Business Model.” Forbes. Forbes Magazine, November 22, 2020. https://www.forbes.com/sites/georgecalhoun/2020/11/16/why-china-stopped-the-ant-groups-ipopart-2-ants-dangerous-business-model/. 

Chin, Josh, and Chuin-Wei Yap. 2018. “China Swats Jack Ma's Ant Over Customer Privacy.” The Wall Street Journal, Dow Jones & Company, 10 Jan. 2018, www.wsj.com/articles/china-swats-jack-mas-ant-over-customer-privacy-1515581339 

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Leng, Cheng, and Julie Zhu. 2020. “ANALYSIS-Stepped up Chinese Scrutiny Increases Investment Risk of 'Beast' Ant.” Reuters. Thomson Reuters, October 15, 2020. https://www.reuters.com/article/ant-group-ipo-regulations/analysis-stepped-up-chinese-scrutiny-increases-investment-risk-of-beast-ant-idUSL4N2H0171. 

Liao, Rita. 2020. “China Postpones Ant's Colossal IPO after Closed-Door Talk with Jack Ma.” TechCrunch, TechCrunch, 3 Nov. 2020, techcrunch.com/2020/11/03/china-postpones-ants-colossal-ipo-after-closed-door-talk-with-jack-ma\ 

Lyons, Kim. 2021. “China Fines Alibaba $2.8 Billion after Antitrust Investigation.” The Verge. The Verge, April 10, 2021. https://www.theverge.com/2021/4/10/22377500/china-fines-alibaba-2-8-billion-anitrust. 

Sorkin, Andrew Ross, et al. 2020. “A Mighty Ant.” The New York Times, The New York Times, 27 Oct. 2020, www.nytimes.com/2020/10/27/business/dealbook/ant-group-IPO.html 

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Xie, Stella Yifan, and Serena Ng. 2020. “Ant IPO Promises $8 Billion Gain for Elite Group of Foreign Investors.” The Wall Street Journal, Dow Jones & Company, 29 Oct. 2020, www.wsj.com/articles/ant-ipo-promises-8-billion-gain-for-elite-group-of-foreign-investors-11603970412 

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