Three months ago, a screenshot went viral across the Chinese internet. It was supposedly a screen capture of Alibaba employees gossiping about how there had just been an eruption of cheers from an office building owned by their sister company, Ant Group. ‚ÄúIt is the sound of financial freedom,‚ÄĚ the next line read.
Within minutes, estimates of the net worth of those early stakeholders in the biggest business flotation in history were popping up on smartphone screens. ‚Äú58 worth over $100mm USD!‚ÄĚ one screamed. Of these people, assuming an initial public offering (IPO) valuation of over¬†$300 billion, at least¬†18¬†would be newly-minted billionaires. The internet joked that for the second time, Jack Ma, entrepreneur extraordinaire, had single-handedly ensured the livelihood of the entire Chinese private banking industry.
The first time was six years ago, when Ma‚Äôs other creation, Alibaba, broke the previous record for the biggest IPO in history, raising¬†$25¬†billion. For those unfamiliar with Asian e-commerce, Alibaba is China‚Äôs biggest online trading platform, by far. It has 700 million customers. It processes half a million orders a second. Ant Group is its financial services spinoff and until last week it was expected to retake the IPO crown from Saudi Arabia‚Äôs Aramco, which has held it for barely ten months. Part of the reason for the scale of the offering is that Ant was to list its shares on two exchanges at the same time, raising $17Bn in each of Shanghai and Hong Kong for a staggering total of $34Bn. The other part of the reason? Ant is gargantuan, even by Chinese internet standards.
In a market where users are regularly measured in the hundreds of millions and transactions in the hundreds of billions, Ant‚Äôs metrics often come with an extra zero, and sometimes two. It has more than a billion active users. Last year it processed payments worth $17 trillion, with a t, which is 25 times the volume of business handled by PayPal, its biggest non-Chinese equivalent.
Investors fell in love with Ant‚Äôs mind-boggling scale and growth. The offering was so oversubscribed that even Singapore‚Äôs sovereign wealth fund feared that it would receive only a sliver of its desired allocation. Individual investor demand was even more fervent. The Shanghai portion of the offering alone generated nearly¬†$3¬†trillion-worth of demand from retail investors, making it 872 times oversubscribed.
And then, last Tuesday, it all came to a shuddering halt. That morning the Shanghai stock exchange sent Ant a note saying it would no longer be proceeding with the IPO. Citing Chinese regulatory changes, the exchange indicated that approval for the listing had been suspended. Barely six weeks earlier it had given the massive flotation a fast-tracked greenlight to list on its Star Market, China‚Äôs newest answer to the NASDAQ and a favored initiative of President Xi Jinping.
What could account for such a stunning reversal?
The question is not an idle one. Any wrinkle in the relationship between capitalism and China‚Äôs one-party state has potentially vast consequences, and this looked like a stand-up row ‚Äď at least. As for answers, on one level this is a story about capital-to-loan ratios and financial stability. On another it goes to the heart of Xi‚Äôs 30-year project to crush dissent, consolidate power and bind corporate China tightly to the party and the state.
Xi‚Äôs government is known for cracking down on billionaires whose ambitions conflict with its own goals. Exhibit one in this file is Jianlin Wang, China‚Äôs richest man before Ma, forced to sell off his international assets when the government decided to limit overseas investments. But Ant seemed to be different. Its focus was China, and specifically China‚Äôs expanding, striving middle class. It was helping consumers and small businesses and developing the domestic economy. Its successful listing would have greatly raised the profile of the new Shanghai exchange. It might even have reassured the world that Hong Kong, too, remained open for business.
Beneath all the exuberance, though, trouble had been brewing for months. Ant positions itself as a financial technology company, but it performs many of the same functions as more traditional financial institutions ‚Äď without the lag. Courtesy of a single umbrella app its users can borrow, lend, pay, invest, insure and generally shift money around at the speed of light, with minimal fees and the option at every point of shopping around for the best deals from hundreds of third-party online financial service providers that use it as a platform.
That‚Äôs the offer, and Chinese individuals and businesses love it. In ten years flat, much of China‚Äôs consumer economy has moved online. The volume of online transactions rose 200-fold between 2010 and 2019, to 201 trillion yuan or 30¬†trillion¬†US dollars. Ant became the essential lubricant for this prodigious surge in economic activity, or so it hoped. But the events of the last ten days have been a reminder that in the end Ma stands for much that Mao didn‚Äôt. A collision of some sort may have been inevitable. As Jeffrey Towson, a professor at the Peking University Guanghua School of Management, observes, ‚Äútech giants need to tread lightly in domestic Chinese banking‚ÄĚ. In particular, he says, ‚Äúthey need to tiptoe in credit‚ÄĚ.
This, in the end, was the battleground; the multi-trillion-yuan question. Who gets to control the flow of short-term lending to China‚Äôs exploding middle class? The Communist government or the charismatic businessman with a fondness for outlandish costumes?
Jesus took a dim view of usury and it turns out Xi is squeamish about it too. Worried about rising consumer debt ‚Äď and probably channeling Xi‚Äôs concerns about Ma‚Äôs rising influence ‚Äď officials at the People‚Äôs Bank of China warned over the summer that tighter lending regulations were coming, especially for ‚Äúnon-bank‚ÄĚ financial institutions like Ant. But that didn‚Äôt sit well with Ant‚Äôs business model, or its founder. Microlending is Ant‚Äôs biggest revenue segment, accounting for a third of its $18 billion in earnings in 2019 and an even larger share this year. As the IPO date neared and excitement heightened, further regulation seemed a serious but distant risk. So Ma took a risk of his own. One night last month he took the podium at a Shanghai fintech conference and attacked the regulators, some of them sitting right there in the audience.
Most entrepreneurs would have tried to butter up their overseers and leave their fears unsaid. Ma went for the jugular. He likened one of the most important agreements of modern finance, the Basel Accords, to a ‚Äúgeriatric club‚ÄĚ. Forged after the Second World War, the accords were an answer to financial instability born of the industrial age and thus unfit for the Chinese financial system, which was still ‚Äúin its youth, an immature ecosystem not yet interconnected in its flows,‚ÄĚ Ma said. The accords require financial institutions to have enough capital on hand to absorb losses and withstand fluctuations, but Ma likened their implementation to ‚Äúfeeding dementia medication meant for seniors to a child suffering from polio‚ÄĚ.
The speech went viral.¬†Those who read it were divided over its meaning, but Ma had blasted the question wide open for public debate. Should ‚Äúinnovative‚ÄĚ businesses like Ant, with their big data and algorithms, be regulated like financial institutions from another age? Yes, the government seemed to say, as a flurry of op-eds in state-owned media stressed the importance of managing risk, even at the expense of growth.
Then the unthinkable happened. A week after his speech Ma and Ant‚Äôs Chairman as well as CEO were called to an official meeting with four of China‚Äôs top financial regulators, including the central bank and the agency that oversees securities. Such meetings are rare, serious and often viewed very negatively by the markets. On the same day, a draft of new rules seeking to rein in the microlending business was released. They were significantly more restrictive than the ones they were intended to replace, capping loan sizes and increasing Ant‚Äôs capital requirements by billions of dollars. Ant would need a new set of disclosures and almost certainly a new valuation. By one estimate it would have to put aside $20 billion to boost its capital reserves. Its headwinds had suddenly transformed into a bitter storm; there was nothing for it but to pull the IPO.
Did Ma‚Äôs fighting words in Shanghai precipitate Ant‚Äôs crisis? They were certainly a factor. ‚ÄúThe party is flexing its muscles,‚ÄĚ Victor Shih of UC San Diego told Bloomberg last week. ‚ÄúIt‚Äôs saying to Ma, you are going to have the biggest IPO in the world, but that‚Äôs not a big deal for the CCP [Chinese Communist Party], which overseas the world‚Äôs second-largest economy.‚ÄĚ
On the same day the same outlet carried a piece by Shuli Ren, its Asian markets columnist, saying Beijing was ‚Äúlooking as childish and moody as Trump on the day of the US election‚ÄĚ. For good measure Ren called the IPO fiasco ‚ÄúRay Dalio‚Äôs nightmare‚ÄĚ ‚Äď a reference to billionaire New York investor and China booster. Dalio promptly replied that it was not his nightmare but a response by ‚Äúvery reasonable‚ÄĚ Chinese officials to a tough regulatory challenge.
The exchange captured nicely the way the world is split on Ant.¬†What‚Äôs clear is that its story cannot be separated from that of the 56-year-old former English teacher who founded Alibaba 21 years ago in a small flat in Hangzhou, not far from Shanghai. Now the second-richest person in China (he was the richest until last week; net worth now about $54 billion), Ma is Ant‚Äôs biggest individual shareholder. He has an 8.8 per cent stake and over half of its voting power. Even though he quit official business duties in 2018 he remains its face and soul.
He occupies a unique place in China‚Äôs pantheon of business icons, not so much for his wealth as his reputation for entrepreneurial daring and plainspoken wisdom. A decade ago and with far fewer zeroes to his name than today, his speeches were already being studied for their style and commercial insight. Airport bookstores sold DVD sets of his teachings: ‚ÄúToday is cruel, tomorrow is more cruel, and the day after tomorrow is beautiful. But most people die tomorrow night, so don‚Äôt you give up today.‚ÄĚ As fellow billionaire Richard Liu of JD.com would say of him, somewhat enviously, ‚ÄúJack knows how to speak with passion and from the loftiest perspectives.‚ÄĚ
Skinny, short and the opposite of handsome, Ma is known as ‚Äúalien‚ÄĚ by many of his online followers. (It‚Äôs meant as a tribute to his unusual appearance, and the way his business ideas seem to defy gravity, but he also likes to dress up. As chairman of Alibaba he liked to preside over mass employee weddings in a long grey gown that made him look like an extra from¬†Star Wars.) As a child, according to approved company legend, he often got into fistfights with others. Never one to stay in line, he loved the thought of being the martial arts hero who rights wrongs. Many years later, he would realize that dream by appearing in his own kung fu film, fighting legends like Jet Li and Donnie Yen.
He was not a particularly good student, famously scoring a single point on his first attempt at the college entrance examination. This is not only quite a feat but in China amounts to a sort of mortal sin. It took two more tries over the next two years before he was finally admitted to the local Hangzhou Normal University to study English. Many might have given up, but Ma pressed on and now wears his failures as a badge of honor. Recently he tweeted a short film of himself returning to the birthplace of Alibaba and reminding viewers that ‚Äúit‚Äôs dreams that keep us never afraid of the mistakes‚ÄĚ.
This image of blunders and bootstraps is curated to make him more relatable than many of his peers ‚Äď nerdy Chinese tech moguls, many of whom were child prodigies who attended elite schools, studied abroad and seemed to stroll to their success. Ma‚Äôs story shows what‚Äôs special about being a tech entrepreneur in the new China. You can be a late bloomer, even a downright failure, but as long as you‚Äôre fearless about the opportunities you see, you too can be wealthy beyond measure.
After graduating, he was assigned to be an English teacher at a nearby school. Education was not his calling, but it does infuse his style: ‚ÄúTeacher Ma‚ÄĚ is an identity he has held onto down the years.
In 1999, along with seventeen partners including his wife, he scraped together about $70,000 in startup capital and founded Alibaba. The name was chosen for being easy to pronounce and remember for both Chinese suppliers and foreign buyers, whom the website was seeking to connect. It was an ambitious plan ‚Äď by this time, the Internet had only been available in China for three and a half years ‚Äď but it succeeded.
China‚Äôs Mom and Pop economy needed a home on the web and Alibaba provided one. The broader economy needed a full-service online cash-and-carry. Alibaba provided that too, and it went global. If you need to place a bulk order from anywhere in the world for reasonably-priced fake hair, electric scooters, lug nuts for pick-ups, or poly-tunnels for tomatoes, Alibaba‚Äôs probably your best bet.
It now employs 100,000 people, but still competes for business like a start-up. By 2003 a different type of online commerce was emerging ‚Äď not business-to-business like Alibaba but consumer-to-consumer like eBay and¬†EachNet, a local Chinese player. Ma and his team saw that this was taking over as the hottest new area of growth, so they switched focus, launched a Chinese equivalent of eBay called Taobao and grew it into one of the most popular ecommerce sites in the world.
Taobao‚Äôs unique selling point was that it didn‚Äôt charge sellers. It rejected a transaction fee model popular in the West in favour of a free-to-list, advertising-based system that Ma thought would be more appropriate for China. Much else would have to be rethought as well. In a story that would repeat itself, Chinese internet businesses were finding that they couldn‚Äôt just clone what they read in the news from America. In addition to lower internet penetration and computer literacy, the country lagged in¬†everything.
Payments, logistics, even talent‚Ä¶ it was obvious that everything that touched the online transaction needed to be built or upgraded. So Ma and his team set about constructing it, and the first problem they encountered was a chronic lack of trust in online transactions.
Chinese customers like to try before they buy, or at the very least get goods before they pay for them. Ma‚Äôs solution was a digital escrow service that he called Alipay, launched five months after Taobao. He would recount later that he was forced to create the service himself because no bank would help him. His motto: ‚ÄúIf the banks don‚Äôt change, we‚Äôll change the banks.‚ÄĚ He knew that operating a financial service without a license was a crime in China, but said he was prepared to go to jail. In fact he told colleagues they should be prepared to join him there.
Instead of going to jail, he landed on Free Parking. Alipay provided a safeguard against dishonest sellers by collecting the money from the buyer first, but not disbursing it until the goods had been received and acknowledged. The product was an immediate hit, and soon Alipay expanded from merely guaranteeing transactions on Taobao into partnering with other platforms, anywhere transactions were taking place.
Take the iPhone. By 2009, two years after its launch, Ma and his team were already convinced, much like the rest of China, of the potential of the mobile internet. Alipay on a smartphone could facilitate offline transactions, they thought. How? They looked to the QR code, an overlooked Japanese invention at the time. It was launched two years later in 2011 and revolutionized how users paid for goods offline. You could use your smartphone camera to scan the QR code of any offline item and pay for it in seconds, completely bypassing and replacing traditional payment methods. This helped Alipay cement its dominant position as China‚Äôs go-to digital wallet. It also established a financial relationship with hundreds of millions of customers that was entirely independent of the Chinese state.
The timing was good. China would overtake the rest of the world as the largest smartphone shipment market that year, a position it held for most of the rest of the decade. Alipay and its peers were so instrumental in remaking the average Chinese person‚Äôs daily life that mobile payment would be named one of the country‚Äôs Four New Inventions in state media. By 2018, 92 per cent of urban users in China used either Alipay or competitor WeChat Pay as their primary means of payment.
Today, Alipay‚Äôs success surprises no one. It takes a 0.6 per cent commission on every transaction from the merchant side, and its growth is supercharged by Alibaba‚Äôs continued dominance of China‚Äôs e-commerce market ¬†‚Äď the world‚Äôs largest and still one of the fastest-growing. (The UK‚Äôs e-commerce market, in third place, is less than one-tenth the size of China‚Äôs, which is worth $1.5 trillion.)
The Alipay Incident
If you were pleased to be invested in Alibaba a decade ago, you were especially pleased to be invested in Alipay as part of the package. Alibaba was the goose; Alipay the golden egg. No wonder, then, that when Ma surreptitiously¬†carved out¬†Alipay in 2011 under the pretence of the need to comply with new government regulation, Yahoo and Softbank, the two largest shareholders, cried foul. From being one of Alibaba‚Äôs most prized assets, Alipay was suddenly and without warning no longer part of the company. Chinese entrepreneurs angrily agreed with the foreign investors: divesting a key asset without notifying one‚Äôs shareholders was not acceptable.
Not wanting to lose their winning ticket in the yet-to-IPO Alibaba, investors settled for a reduced but still meaningful stake in a new entity named Ant Financial. But Ant‚Äôs birth story was and remains a stain on Ma‚Äôs legacy even in China, where it‚Äôs known as ‚ÄúThe Alipay Incident‚ÄĚ. Elsewhere, it‚Äôs brought up as an example of the precariousness of doing business in China.
But what is the alternative? The Chinese banking sector is state-owned and notoriously slow and stodgy. It has little incentive to innovate and every reason to maintain the status quo, where it primarily services the largest, most creditworthy clients. Ant is a private company with an internet DNA, more than willing to meet the changing needs of the Chinese consumer and the small businesses that cater to them. It exists for what Chairman Eric Jing calls ‚Äúthe little guys‚ÄĚ in China‚Äôs economy.
The little guys love to invest. In 2013 it launched Yu‚ÄôE Bao (literally, ‚Äúleftover treasure‚ÄĚ), a money market product that gave users returns on deposits as low as one RMB, or about $0.15. It was so popular that for a while Ant had to impose daily limits on deposits so as to not overwhelm the market. People would set alarms to put their money in the queue every morning. Competitors have piled in but Yu‚ÄôE Bao is still one of the largest funds of its kind in the world, with $173 billion of assets under management.
Yu‚ÄôE Bao‚Äôs success emboldened Ant to start offering more sophisticated investment products, but the most profitable part of its business is unsecured lending ‚Äď or, in Ma-speak, CreditTech.
China lacked, and still lacks, a comprehensive credit system of its own. The government brought in an official system in 2008, but it doesn‚Äôt have Ant‚Äôs extensive payments data; powerful numbers that can assess with much greater accuracy the creditworthiness of individuals and small businesses.
Good scores mean quick loans. MYBank, an Ant-owned bank that has lent to millions of small businesses through CreditTech, has a¬†3-1-0¬†system for processing applications: 3 minutes to apply, 1 second to get a decision and 0 humans involved. For the most part Ant doesn‚Äôt use its own capital; almost all its lending activities are underwritten by partner institutions. Ant is just the conduit: open the app, tap on Sesame Credit, or Huabei (Just Spend!) or Jiebei (Just Borrow!). Pretty soon you can go shopping, and don‚Äôt be surprised if you find yourself doing it on Ant or Alibaba. Eighty per cent of Ant‚Äôs customers use three or more of its services, and 40 per cent use all five.
It‚Äôs this kind of closed loop ecosystem that investors love; each new user can represent multiple, growing and mutually reinforcing revenue streams. But what gets investors excited can get regulators agitated. Ant‚Äôs flywheel of payments, credit and loans gives it a tremendous competitive advantage over the traditional financial system, and regulators ‚Äď a.k.a. the state ‚Äď are still working out how to tame this beast. They‚Äôve accused it of predatory lending. An advertisement that seemed to encourage a working class father to resort to borrowing money to throw his daughter a birthday party was roundly criticized by the population for promoting the wrong values. Ant‚Äôs privacy standards, too, have come under attack, even though so far it‚Äôs not thought to have shared its immense trove of personal credit data with the government. It‚Äôs a brand still trusted by consumers, but that trust may be wearing thin along with the government‚Äôs patience.
Several prominent opeds have appeared in state-controlled media urging regulators to ‚Äúbe brave and say ‚Äėno‚Äô to BigTech‚ÄĚ. The risk, these articles say, is that the system will be led astray by the promise of technology, kidnapped by public opinion, loaded with unmanageable risk.
Meanwhile, the world watches. Before this year, Ant invested heavily in at least¬†a dozen¬†foreign fintech companies, including UK currency exchange group WorldFirst. This year it has pulled back. Geopolitics are not affecting Ant as much as Huawei or Bytedance (owner of TikTok), but it has been affected by many countries‚Äô increasing animosity towards China. Alipay is currently blocked by the Indian government, one of hundreds of Chinese apps banned in what most people believe is retaliation for ongoing border disputes in the Himalayas. Ant‚Äôs attempted acquisition of Moneygram, a US money transfer company, was blocked in 2018 because of national security concerns. Most recently, the US State Department submitted and then cancelled a proposal to put Ant on a trade¬†blacklist.
Back home, there‚Äôs a good benchmark by which to judge its status. One of the most enduring icons of modern China is the national women‚Äôs volleyball team. Last month, a blockbuster film recreated their many victories and the whole nation seemed to sink into a collective sentimental reverie. The generations of women players are beloved because they are world champions, but it‚Äôs because their story parallels so closely the entire country‚Äôs journey, or at least the approved account of it, that they have such a deep grip on the Chinese consciousness. From the despair of practicing with bloodied knees on dirt floors (because they were too poor to have proper facilities) to today‚Äôs world-class training blending the best of the east and west, their story is one of China‚Äôs metamorphosis from dogged pursuer to front of the pack.
Until last week it seemed that this was also the story of Ant Group, of Alibaba, and of Jack Ma: the underdog who never rests, and who rises, however improbably, to define a standard of excellence not just for China but the world. That triumphant third act is now on pause. Xi‚Äôs government has decided that Jack Ma and Ant are not the women‚Äôs volleyball team after all. The message from the politburo: entrepreneurs in the age of Xi need to stay in their lane. Success is no license to sidestep regulations and rewrite the rules. That would be destabilizing for an already fragile economy, and a bad precedent to set for the throngs of other fintech companies waiting in the wings and hoping for growth at any cost. The government, it seems, is happy to be in the ‚Äúgeriatric club‚ÄĚ after all.
For some the latest chapter in Ma‚Äôs story will recall Mikhail Khodorkovsky‚Äôs 2003 clash with Vladimir Putin over the rise and rise of the Yukos oil giant, and Khodorkovsky‚Äôs ambitions with it. But there‚Äôs a difference. There is no sign ‚Äď yet ‚Äď that Ma is going to prison. Beijing needs Ant and broadly welcomes its innovations. It just wants to be clear which innovations make it and which don‚Äôt.
Online commentary has been broadly supportive of the government: ‚ÄúJack Ma has become so egotistical that he thinks he‚Äôs above the law now.‚ÄĚ ‚ÄúSocialism with Chinese characteristics is the defining feature of China, not capitalism.‚ÄĚ Such posts may or may not reflect the public mood, but they provide a contrast to the overseas alarm at what looks like confirmation of China‚Äôs reputation as an opaque and arbitrary place to do business.
‚ÄúThe last minute suspension of the IPO doesn‚Äôt tell the world China is a sophisticated and prudent regulator,‚ÄĚ says Peter Lorentzen, Professor of Applied Economics at the University of San Francisco, who has published research on governance and social control in China. ‚ÄúInstead, the lack of transparency around the decision and the widespread rumors of a political motivation can only remind both Chinese and foreign investors that for all the progress China has made, everything can hinge on the sometimes capricious decisions of leaders who prioritize their own power over everything else.‚ÄĚ
There‚Äôs no need to weep too much for Ant though. It‚Äôs expected to survive. The government has affirmed as much. It believes the company provides valuable services to the public, and the new regulations promise that the credit business will be overseen by financial policymakers. The grey zone in which Ant flourished may get less grey but if high barriers are erected for new entrants to the market, that could help Ant stay ahead of new competitors.
Don‚Äôt worry too much about its investors either, who will see their money returned, interest and all, even if they have to make their next billions elsewhere.
It‚Äôs Jack Ma whose recovery is less certain. He went all out to lobby for his company‚Äôs interests, and for what he believed was the best way forward for economic growth. He didn‚Äôt succeed, and he must have known that the odds were stacked against him. But what did we expect from the child whose teachers remember as the one who got into the most fistfights? The one who fought until the bone poked through the skin of his knuckles and then went to get stitches without anesthesia? If his past is any indication, don‚Äôt expect him to give up. Remember: ‚ÄúToday is cruel, tomorrow is more cruel, and the day after tomorrow is beautiful.‚ÄĚ
Photographs Getty Images, Shutterstock, Alibaba Group