By Jing Yang and Lingling Wei
Chinese President Xi Jinping personally made the decision to
halt the initial public offering of Ant Group, which would have
been the world's biggest, after controlling shareholder Jack Ma
infuriated government leaders, according to Chinese officials with
knowledge of the matter.
The rebuke was the culmination of years of tense relations
between China's most celebrated entrepreneur and a government
uneasy about his influence and the rapid growth of the
digital-payments behemoth he controlled.
Mr. Xi, for his part, has displayed a diminishing tolerance for
big private businesses that have amassed capital and influence --
and are perceived to have challenged both his rule and the
stability craved by factions in the country's newly assertive
Communist Party.
In a speech on Oct. 24, days before the financial-technology
giant was set to go public, Mr. Ma cited Mr. Xi's words in what top
government officials saw as an effort to burnish his own image and
tarnish that of regulators, these people said.
At the event in Shanghai, Mr. Ma, the country's richest man,
quoted Mr. Xi saying, "Success does not have to come from me." As a
result, the tech executive said, he wanted to help solve China's
financial problems through innovation. Mr. Ma bluntly criticized
the government's increasingly tight financial regulation for
holding back technology development, part of a long-running battle
between Ant and its overseers.
Mr. Xi, who read government reports about the speech, and other
senior leaders were furious, according to the officials familiar
with the decision-making. Mr. Xi ordered Chinese regulators to
investigate and all but shut down Ant's initial public offering,
the officials said, setting in motion a series of events that led
to the deal's suspension on Nov. 3. Investors around the world
already had committed to paying more than $34 billion for Ant's
shares. It isn't clear whether it was Mr. Xi or another government
official who first suggested the shutdown.
Ant declined to comment, and Mr. Ma couldn't be reached. The
Information Office of the State Council, China's cabinet, didn't
respond to questions.
Since Mr. Xi rose to power in late 2012, the government has
taken action against some of the country's highest-profile private
conglomerates. Dalian Wanda Group's Wang Jianlin, once China's
richest man, and Wu Xiaohui of Anbang Insurance Group, are among
the prominent entrepreneurs who faced government crackdowns.
"Xi doesn't care about if you made any of those rich lists or
not," said a senior Chinese official. "What he cares about is what
you do after you get rich, and whether you're aligning your
interests with the state's interests."
Chinese regulators have long wanted to rein in Ant, according to
the Chinese officials with knowledge of the decision-making. The
company owns a mobile payments and lifestyle app, called Alipay,
that has disrupted China's financial system. Alipay is used by
roughly 70% of China's population, has made loans to more than 20
million small businesses and close to half a billion individuals,
operates the country's largest mutual fund and sells scores of
other financial products.
Ant largely focused on serving people and companies that
traditional banks long ignored, and it has emerged as an important
cog in Chinese finance. It has long been spared from the tough
regulations and capital requirements that commercial banks have
been subject to.
Regulators earlier met with strong resistance to efforts to rein
in Ant from the company's financial backers, reflecting the support
Mr. Ma has had from individuals in China's top political and
business echelons, according to a person familiar with the matter.
Ant's shareholders include Boyu Capital, a private-equity fund
whose partners include Alvin Jiang, the grandson of former Chinese
leader Jiang Zemin. China's national pension fund, China
Development Bank and China International Capital Corp., the
country's top investment bank, all have large unrealized profits on
their investments in Ant.
Mr. Xi sought to tighten financial regulations overall after the
2015 stock-market crash in China that tested the party's firm hold
on the economy. He also came to appreciate the benefits of having
firms like Mr. Ma's, whose payment app and lending operations
changed the way the Chinese spend money, provided a reliable source
of funding for small businesses, and made Alibaba Group Holding
Ltd., the e-commerce giant which Mr. Ma co-founded and used to run,
the pride of China.
"It has always been a very complicated relationship between Ant
and the government," said Cornell University professor Eswar
Prasad, a former head of the International Monetary Fund's China
division. He said the company is no longer seen as too big and
influential to be reined in by government agencies. Mr. Ma's speech
in October "was a trigger for the government to act," he said.
Over the past decade, Mr. Ma, 56 years old, has come to
epitomize the success of China's internet and technology stalwarts.
A former English teacher who loves martial-arts novels and Tai-chi,
he founded e-commerce company Alibaba in his apartment in 1999, and
its 2014 listing in New York held the record for the world's
largest IPO until last year.
Before his retirement from Alibaba last year, Mr. Ma often sang
and performed at annual company galas. He celebrated his last day
at the company by performing in a rock band wearing braided hair
extensions and a leather jacket with spikes, in a Hangzhou stadium
packed with 40,000 Alibaba and Ant employees.
Alibaba this year solidified its position as China's most
valuable listed company after more than quadrupling its market
capitalization in barely six years. Ant's listing, had it gone
ahead, would have valued the company at more than $300 billion and
made it worth more than most of China's and America's largest
banks.
Ant's roots trace back to 2004, when Alipay was started as an
escrow service to facilitate payment transactions on Taobao,
Alibaba's online marketplace. Mr. Ma split off Alipay from Alibaba
in 2011, a move that sparked an outcry from some of Alibaba's big
foreign investors and later resulted in a settlement with them.
Mr. Ma controls 50.5% of Ant's voting rights, but he hasn't ever
held an executive or managerial position in the six-year-old
company.
In 2008, when he was Alibaba's CEO, Mr. Ma had lamented at a
public forum that traditional banks in China were ignoring
businesses that badly needed funding. "If the banks don't change,
we will change the banks," he said, explaining that he envisioned
"a more comprehensive lending system that served the needs of small
businesses."
In 2013, as Alibaba's chairman, he again took aim at traditional
Chinese lenders, saying at a public forum in Shanghai that the
country didn't lack banks or innovative institutions, but a
financial institution that could power China's economic growth in
the next decade. "The financial industry needs disrupters" and
outsiders to bring about changes, he said.
Around that time, Alipay created an online money-market mutual
fund designed to help individuals earn investment returns on spare
electronic cash sitting in their Alipay wallets. It was an instant
success. Some people moved money out of their bank accounts into
the new fund to earn higher returns, drawing complaints from some
lenders that Alipay was siphoning their deposits.
In 2014, Alipay, along with Alibaba's other financial
businesses, were folded into Ant Financial Services Group, the
company now known as Ant Group.
For years, Mr. Ma largely managed to navigate Mr. Xi's two
seemingly contradictory goals: encouraging financial innovation and
open markets to drive growth while keeping a rein on market forces
to maintain control.
Ant's big money-market fund became the world's largest of its
kind, with more than $250 billion under management by 2017. China's
securities regulator became concerned about the systemic risk the
fund could create, and pressured it to shrink and lower its
returns. Ant changed its strategy, letting rival money managers
sell similar funds on Alipay to investors needing places to park
their money, and its main fund shrank.
In 2017, China's leadership revamped the country's fragmented
regulatory regime, which had often involved various regulators
acting in isolation. It named Liu He, Mr. Xi's top economic czar,
head of a superregulator of sorts called the Financial Stability
and Development Committee. One of its goals was to better
coordinate actions by China's various regulatory agencies.
Ant raised three rounds of private capital. By mid-2018, it was
the world's most valuable startup, worth $150 billion, based on the
prices private investors had paid.
This year, deteriorating relations between the U.S. and China
gave Mr. Ma an opportunity to win points with the ruling party.
With Washington threatening to delist Chinese companies from U.S.
stock markets, Beijing was eager to build up its own exchanges. Its
securities regulators saw having a company such as Ant listed in
both Shanghai and Hong Kong as a big endorsement of China's
markets.
Ant changed its name in the summer, dropping the words
"Financial Services." Shortly after, it announced plans to go
public, right around the first anniversary of China's Nasdaq-style
Science & Technology Innovation Board, better known as the STAR
Market. After Ant filed listing documents in Hong Kong and
Shanghai, the stock exchanges and Chinese securities regulators
moved quickly to green-light its IPO.
But trouble was brewing with banking regulators, who were
growing concerned about the risk banks were taking on by lending to
Ant's customers online. Since the summer, a spate of government
regulations, guidelines and notices were rolled out to contain
potential risks from the growth of digital finance and
microlending.
The world's biggest stock sale proved extremely popular with
large and small investors. Privately, however, some Ant employees
were worried about potential regulatory changes that could hurt the
company's growth prospects, according to people familiar with the
matter.
On Oct. 24, Mr. Ma took the stage at a financial forum in
Shanghai attended by top regulators, politicians and bankers. He
said Ant's IPO was "a miracle," being such a large deal taking
place away from New York. Attendees included China's Vice President
Wang Qishan, central bank governor Yi Gang and some senior
state-bank executives.
During his 21-minute speech, he criticized Beijing's campaign to
control financial risks. "There is no systemic risk in China's
financial system, " he said. "Chinese finance has no system."
He also took aim at the regulators, saying they "have only
focused on risks and overlooked development." He accused big
Chinese banks of harboring a "pawnshop mentality." That, Mr. Ma
said, has "hurt a lot of entrepreneurs."
His remarks went viral on Chinese social media, where some users
applauded Mr. Ma for daring to speak out. In Beijing, though,
senior officials were angry, and officials long calling for tighter
financial regulation spoke up.
After Mr. Xi decided that Ant's IPO needed to be halted,
financial regulators led by Mr. Liu, the leader's economic czar,
convened on Oct. 31 and mapped out an action plan to take Mr. Ma to
task, according to the government officials familiar with the
decision-making.
At a meeting of the Financial Stability and Development
Committee headed by Mr. Liu, the group decided to "put all kinds of
financial activities under regulation and treating the same
businesses in the same way," according to a government
statement.
The decision was aimed squarely at Ant, the government officials
said, and cleared the way for the pro-stability members of the
group to dust off draft regulations they had been working on for a
long time.
Among them was one regulating online microlending. With Mr. Xi's
blessing, the central bank and the banking regulator made the draft
rule even tougher than previously conceived, according to the
Chinese officials familiar with the decision-making. The new rule
had a requirement that didn't exist in previous drafts: Firms such
as Ant would need to fund at least 30% of each loan it makes in
conjunction with banks.
The draft rules were published on Nov. 2, the same day Mr. Ma
and a couple of his executives at Ant were summoned to a rare joint
meeting with the central bank and the regulatory agencies
overseeing banking, insurance and securities.
The next day, the Shanghai Stock Exchange suspended the Ant IPO,
citing the meeting and changes in the regulatory environment. The
China Securities Regulatory Commission, which previously signed off
on the listings, now says it was a "responsible move" to protect
investors and markets, as the regulation, once implemented, would
severely limit Ant's business scope and profitability.
Ant could try again to go public. Market participants believe it
will reorganize its business units, rethink its business model and
inform investors of additional risks. All this likely will mean
that Ant's lofty valuation will be cut when it tries to list again,
and the company may not be able to raise as much money as it aimed
for this round, analysts say.
Mr. Ma hasn't made any public comments since the offering
collapsed.
Write to Jing Yang at Jing.Yang@wsj.com and Lingling Wei at
lingling.wei@wsj.com
(END) Dow Jones Newswires
November 12, 2020 13:11 ET (18:11 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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