In November, world attention was concentrated on the U.S. elections, overshadowing another event no less important: the Chinese authorities suspended the planned listing of the Alibaba Group Holding subsidiary, Ant Group, on the Shanghai and Hong Kong stock exchanges.
Ant Group, owned by Chinese tycoon Jack Ma, has become the largest business conglomerate in finance and in China’s digital trade. As a young man, Ma studied English and electronic engineering, and then developed his growing business activities from the 1990s to the present.
Ant’s initial public offering was scheduled for November 5, offering $35 billion worth of shares for sale. Had this been completed, it would have surpassed last year’s record offer of $29.4 billion for Saudi Aramco, the oil giant of Saudi Arabia, and thus would have become the largest IPO in history. It would have, moreover, consecrated the new world of financial innovation and financial technology.
Dizzying Growth in the Digital Payment Space
The domain of electronic payments has developed at full speed in China. According to the newspaper El País,
The volume of transactions in 2018 reached 227.4 trillion yuan (about US$33.11 billion), according to data from the People’s Bank of China, a figure 28 times higher than that of five years ago. For this year the institution is preparing what will be the first national digital currency. Ant’s app, Alipay, has been one of the key players in this process, along with its great rival, WeChat, owned by Tencent.
The same newspaper also notes,
Alipay was born in 2004 as a tool to facilitate mutual transactional trust between consumers and sellers on Taobao, Alibaba’s e-commerce platform. Since then, its growth has been unstoppable: the app has more than 900 million users in China and the QR codes with which payments are made can already be seen in shops around the world. Once the use of Alipay to pay for consumer products and accumulate savings became popular, this opened the door for Ant to start offering its users financial products such as loans, investments and insurance, all of them personalized in detail, thanks to the accumulated information on user behavior after thousands of transactions.
To get an idea of Alipay’s size, consider that last year it handled payments of 110 trillion yuan (US$16 trillion), almost 25 times more than PayPal, the largest online payment platform outside China.
But as the Economist says,
More important than its size is what Ant represents. It has global significance that no other Chinese financial institution has achieved. Chinese banks are huge but inefficient, burdened by state ownership. In contrast, foreign financiers look at Ant with curiosity, envy, and anxiety. Some hawks in the White House are said to want to contain the company or lock in its IPO. Ant is the world’s most integrated financial technology platform: a combination of Apple Pay for offline payments, PayPal for online payments, Venmo for transfers, MasterCard for credit cards, JPMorgan Chase to finance consumption and iShares for investments, with an insurance broker added, all in one mobile app.
Rule Number One: In Xi’s China, the Party Rules
Given the significance of Alipay, it is not surprising that when President Xi Jinping details China’s plans to outshine the United States, no face comes to mind faster than Jack Ma’s. So what are the reasons for his public defenestration?
For most Western media, Ma overreached by speaking truth to power about the failures of China’s financial system. Sure enough, days before the largest public listing in the industry, Ma delivered a speech in Shanghai urging financial regulatory reform: “We do not have systemic risk, because basically there is no system in China’s financial industry. In reality, the real risk is ‘the lack of a financial system.’ … Banks today still hold a pawnshop mentality. A pawnshop is about pledges and collaterals.” Noting that there are too many controls in China’s financial regulations, he added that there are “all kinds of new documents prohibiting this or that” despite the lack of supportive policies.
At the same forum, Ma maintained that the Basel Accords, the great consensus on financial regulation adopted by the G20, was an outdated scheme, more interested in controlling the risk of financial institutions than in achieving the development of the new generations and the emerging markets. According to Ma, the financial system should rely less on the big banks and more on a set of “lakes, reservoirs, small streams, and rivers” that carry resources to all the corners of the economy.
But the summit’s keynote speaker, Chinese vice president Wang Qishan, nevertheless sent a different message. In his first public appearance in nearly a year, Wang emphasized the importance of financial stability. “There should be a fine balance between encouraging financial innovation, invigorating the market, opening up the financial sector and building regulatory capacity,” he said. “Safety always comes first.” Wang, as President Xi’s anti-corruption czar from 2012 to 2017, became the second-most powerful man in the country.
According to a senior executive of a large international bank in Hong Kong, the regulatory site for Jack Ma, quoted by the Financial Times, indicates that Beijing “wants to put Ant on a leash before the monster becomes uncontrollable.” As this executive reminds us, “Banks in China are not only the core of the traditional financial system, they are an extension of monetary policy.”
By suspending Ant’s initial public offering at the last minute and publicly berating Ma, China’s financial regulators have shown that there is still a more powerful force than the next wave of financial innovation: the state. As noted by Duncan Clark, author of the 2016 book Alibaba: The House That Jack Ma Built,
The Communist party is pushing back. It is showing its disinclination to allow entrepreneurs out of their lane. Commerce is one thing. Finance is clearly another. Jack has embraced the power of the internet to supercharge the private sector but applying this chemistry to the financial sector is on another level it seems.
Behind the Move, the Fear of a Financial Crisis
To this day, despite bad omens, China has managed to prevent its huge accumulation of debt from generating a financial crisis. But the risks are higher than ever. Chinese debt has now reached 279 percent of GDP in the first quarter of 2020, but the authorities are determined to limit the risks that this debt poses for the national economy.
Since 2017, the government has been trying to close the financial tourniquet, but this effort has been challenged by the pandemic, which could eventually lead to a debt level of 300 percent of GDP. As Tokyo-based journalist William Pesek, author of Japanization: What the World Can Learn from Japan’s Lost Decades, puts it,
Xi is surrounded by very smart policymakers. But every industrializing nation crashes at some point. Here, think Japan in 1990, Mexico in 1994, Southeast Asia in 1997, Wall Street in 2008 and Europe in 2010. Perhaps China can beat fate. Yet second Covid-19 waves could devastate exports, or domestic demand. A surge in debt defaults is a risk, what Rosealea Yao of Gavekal Research calls “The Evergrande Effect.” The reference is to China Evergrande Group, the globe’s most indebted developer that owes creditors more than $120 billion. Aberration or canary in the coalmine? We will see. If it is the latter, Alibaba’s 2021 and beyond could suddenly get very dicey.
Against this backdrop, Ma and the Ant Group’s aggressive credit policies risk causing a financial crisis. It might come as a surprise to many that an average credit offer of $300 would lead to such a crisis. But if we leave aside the vision of China that is talked about only in the West — that is, the consumer of luxury products of the new emerging middle class — and look more broadly, we will see that there exists another China of almost 1 billion people. This China collectively has an annual income of $15,000; as of 2015, two-thirds of China’s provinces had an average real monthly disposable income of $300. A sum as paltry as $300 worth of credit might seem like a lot for many parts of China. Some therefore worry that Ant’s financial products are extending beyond the realm of “creditworthiness” into what might be called “China subprime territory.”
Finance in China has always been considered too important to be left to the private sector. Xi went further, making it clear in 2017 that financial stability is so critical that it should be viewed as an aspect of national security, especially after the 2015 stock market crash tested the party’s firm hold on the economy.
In a Turbulent World, We See the Increasing Alignment of Monopoly Companies to State Interests
Alibaba and Ma (who is a member of the Communist Party), as well as other Chinese tech giants like Bytedance and Tencent, depend on the CCP’s endorsement of their businesses. But they have both achieved a certain degree of autonomy with respect to the party, as Ma’s global ambitions demonstrate. A first blow to that vision came in 2018 when the United States blocked Ant’s acquisition of MoneyGram, a money transfer firm, which would have established the Chinese group as a global remittance powerhouse. Closer to home, Beijing pays close attention to Ma’s loyalty to the motherland all the time, especially since the east’s 2015 purchase of the South China Morning Post, whose newsroom in Hong Kong is a microcosm, encouraged by Ma, of Beijing’s idiosyncrasies and its openness to the outside world.
In the turbulent international economy, Xi has emphasized to Chinese businessmen that they should focus more on domestic opportunities. These directives collide with these firms’ appetites and ambitions. But the worsening of the international context with the intensification of the U.S. attempt to destroy Huawei, as well as the behavior of the U.S. government to try to acquire, in a kind of bribery, Bytedance does not fit with their their globalizing enthusiasm. In September the Communist Party called for better ideological education for people working in the private sector, the intensification of party-building efforts in the private sector, and the increased participation of private enterprise in national economic development strategies.
In other words, the new international context is pushing for a closer relationship between Chinese companies and the Chinese government out of geopolitical necessity. So from a more strategic and long-term point of view, we are centrally inclined to view Beijing’s attempt to increase control over the Ant Group not so much as a measure that seeks to crush Ma’s entrepreneurial spirit, nor give a fatal blow to the Ant Group (the company had 71,000 million yuan in cash and equivalents as of June, and it is one of the most systemically important institutions in China), but as a strong wake-up call to large private capital that Chinese companies and the CCP vitally need each other.
The last thing the authorities want is a destabilizing loss of confidence in a business with a key role in the country’s finances. But it’s a slap in the face to Ma, who a few days ago bragged that “its listing is taking place outside of New York.” This argument, with its nationalistic overtones, was not enough to satisfy the Chinese authorities. According to the classical theory of imperialism, the enormous tension of competition in the world market demands that the state maximally centralize its power.
This is especially so in the technological domain, where the large digital companies either become subordinate to the bureaucratic-military complex in their dispute with the United States or risk their future. Ma was warned — by Xi himself, who personally pulled the plug on the Ant group’s listing on the stock market, according to the Wall Street Journal. All this shows how much is at stake.
First published in Spanish on November 15 in Ideas de Izquierda.
Translation: Rob Lyons