China shows Jack Ma what an activist can do

The rare activist moment staged by China's central bank was too late and too crude.

For years, when it came to innovative business ideas, Beijing's stance has been to let them flourish — there would always be room to regulate and rein things in later. And thus gig economy superstars blossomed. China's version of Uber Technologies Inc, DoorDash Inc and PayPal Holdings Inc are even more ubiquitous than their US counterparts at home. 

The other side of the coin is that billions of dollars in paper gains can be made and destroyed within days thanks to regulatory whims. Here, Jack Ma's Ant Group Co is a cautionary tale.

On Sunday, China's central bank released a statement saying that Ant has "little legal awareness," "despised" regulators' compliance requirements and engaged in antitrust behavior. Ant needs to go back to its core payment business, the People's Bank of China said. 

In the first two trading days since then, Alibaba Group Holding Ltd., which owns roughly one-third of Ant, lost over 15% of its market value. Even before the PBOC's interference into Ant's business models Sunday, Alibaba's shares were whacked by a terse, one-sentence announcement from Beijing about probing the company's antitrust behavior on Christmas Eve. Alibaba's Hong Kong-listed shares are entering the year-end just 1.4% away from being in the red. 

That's a further blow to Ma, whose blunt words, likening China's financial system to pawnshops, cost him the world's biggest initial public offering in early November. Ant had been on track to raise $35 billion, with a valuation of more than $300 billion, until regulators pulled it two days before its trading debut.

The company's digital-payment business has become commoditized. The newer, faster growing consumer-lending operation, which the PBOC now seeks to limit, is Ant's high-margin cash cow. So even if the company can somehow regain Beijing's favor and look to go public again, its valuation will be questioned. Ant will no longer be China's MasterCard, but merely its PayPal, which has a lower market value. 

As a longtime observer of Ant, I have often marveled that it ventured to become a public company at all, because it operates in such treacherous regulatory waters. In July, my colleague Anjani Trivedi and I wrote that its IPO would run the risk of exposing how volatile and unsteady China's financial regulations can be. A blockbuster listing felt almost too good to be true. 

This isn't the first time Ant has had a run-in with regulators. The PBOC noticed its flawed lending model as early as 2017. Back then, Ant was packaging consumer loans into asset-backed securities and selling them to institutional investors — often banks. The central bank, worried about the underlying quality of securitized products — which had collapsed Lehman Brothers Holdings Inc. — called a halt to that practice. 

So Ant found another way to build its business. 

Currently, Ant connects banks with consumers, and almost all of the loans it originates sit only on banks' balance sheets. With China being one of the most indebted nations in the world — its debt-to-GDP ratio is edging close to 300% — the PBOC is justifiably worried about bad loans. By asking Ant to put in a capital buffer itself, as Sunday's statement implies, the central bank is essentially telling Ma not to get too clever. 

But why is the PBOC making this public statement now? If only it had published a vaguely worded warning three months earlier, investors and bankers wouldn't have whipped up such frenzy over Ant's IPO and come out this disappointed. 

The fact is, the PBOC does see problems, but often lacks the political capital to do anything about them.

Consider the backdrop. Ant first sought a dual listing in July, when China's tech stocks were staging a bull run, even as the economy struggled to recover from the Covid-19 lockdown. Back then, Beijing was fast-tracking unicorn IPOs, hopeful that a tech infrastructure build-out could stimulate growth. Granted, the PBOC stepped back from open-market operations as early as June, worried that earlier rounds of easing would spur speculative bubbles, but bureaucrats bit their tongues on Ant. President Xi Jinping didn't want to hear about risk control then. 

Fast forward to December. China's economy has recovered, and curtailing debt once again tops Beijing's economic agenda. The 67-year-old Xi, who is virtually president for life, always wanted to deleverage China, because he doesn't want a Minsky Moment to blow up during his lifetime. He started that campaign in late 2017 — around the time the PBOC halted Ant's securitization of its microloans — but got derailed by Donald Trump's trade war and Covid-19. Now that both hurdles are gone, the risk managers at the PBOC have found their voice. 

Of course, it should come as no surprise that China's central bank lacks independence. But that trait matters to global investors, who have piled into China this year because it's the only major economy growing in the pandemic era. Ant is a good reminder that Beijing's politics matter. A vaguely worded statement after years of inaction can wipe out billions of dollars in a blink. Ma's fiasco has turned into a farce, just as ESG investing turned a corner and became a major trend this year. For all the big investment houses rushing to enter China, it's perhaps time to step back and ask: is the country really ready for the global stage?

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement