【Pan Yuanyuan】The Long-Term Implications of Ant’s Delayed IPO
原標題：【Pan Yuanyuan】The Long-Term Implications of Ant’s Delayed IPO
In the long run, the regulation of Ant Group will contribute to a more stable – and thus more favorable – business environment in China. As market maturity improves, regulatory certainty and stability will rise to be the first priority in the business environment. In general, China’s regulation of Ant Group is good news for investors in the long run. It will contribute to stabilizing expectations and creating a favorable business environment, although it is not a liberalization policy in the traditional sense. In the context of financial openness, China will become the choice of more foreign companies and investors.
The classic bestseller “Godfather” cited Balzac’s sentiment at the beginning of the story: “Behind every great fortune there is a crime.” In “Godfather III,” the Corleones wash away the crime and get the family business legalized. Similar stories happen again and again for companies operating in gray areas. Maybe it is Ant Group’s turn to be put on the regulation track.
The abrupt halt to Ant Group’s initial public offering (IPO) sparked much discussion over the nature of the fintech conglomerate. Some argued the change of Chinese regulatory authorities’ attitude signaled a changing business environment, leading to confused reactions from investors and chilling other IPO hopefuls.
I would argue to the contrary: Ant’s IPO suspension and the new regulation portend a coherent regulatory attitude, which will contribute to more favorable business environment in China.
Part of the reason for Ant Group’s breakneck growth lies in the vagueness of its positioning. Ant is a technology company that works with financial institutions. Controlling shareholder Jack Ma has been trying hard to build the image that Ant Group is more of a “techfin” company rather than a “fintech” outfit – naturally, Ant Group would enjoy looser regulations as a result. In fact most of the existing financial regulatory requirements are difficult to apply to Ant directly.
Loose regulations can explain the jaw-dropping growth rate of Ant since 2004. As the IPO prospectus shows, Ant’s Alipay app has more than 710 million monthly users and 80 million monthly active merchants making use of the Alipay platform. The turnover of Alipay digital payments was 118 trillion Chinese renminbi – almost $18 trillion – from July 2019 to June 2020. Ant’s rapid growth has brought about high profit. Ant’s revenue was 121 billion RMB in 2019, with a net profit of 18 billion RMB. That profit forms the basis of its soaring market value.
Ant is not alone. Other fintech companies, such as JD Finance, Didi Finance, and 360 Digital, have more or less adopted similar business models. These companies operate and profit in an uncertain regulatory environment, but their common business model is not sustainable.
Anxiety over when the boots will fall on the ceiling causes sleepless nights, and the uncertainty of China’s regulation of the fintech sector had similar effect. Companies, including Ant, were left wondering how long it would be before regulations were tightened. Companies will chase high profits instinctively, but they also cherish a sustainable, rational operating environment. Sometimes the wish for sustainability even outweighs the profit motive, depending on the size and the maturity of the company. Now that Ant’s operations are being brought under regulations, the fintech environment is on track to become more sustainable. That is actually a positive signal for other companies.
The same rule applies to investors who are seeking long-term returns. A capricious administration would simply scare off all the investors and invite speculators. Under ordinary circumstances, investors will take the regulatory environment as an established exogenous condition and then make corresponding investment decisions. If exogenous constraints change constantly, investors will be more inclined to make short-term investments and be ready to divest at any time, or even take the opportunity to profit at the expense of others, which is destructive to social welfare. No government would encourage such speculation, which bolsters stock markets at the expense of the real economy.
As market maturity improves, regulatory certainty and stability will rise to be the first priority in the business environment. Whether the regulations are loose or strict is ultimately of secondary importance as long as they are consistent. China’s regulation of Ant reassures companies and investors in at least three aspects.
First, the new regulation positions the relationship between the financial sector and the “real” sector.
There is no doubt that stock market should serve the real economy. However, financial sector tends to grow independently from the real sector for the simple reason that capital chases the highest profits. In the absence of regulation, capital can achieve this goal by increasing turnover speed or multiplying the leverage ratio. High profit margins in the markets will draw capital from on-the-ground investments, leading to a decline or even a drain in real-world output.
Some of China’s non-financial companies are highly leveraged, in part because their liabilities are not used for fixed capital formation but instead for investment in capital markets. As the old saying goes, every coin has two sides. Leverage magnifies risks as well as profits; those highly-leveraged companies may have nice profit data, but imply huge risks at the same time.
According to BIS data, China’s credit to non-financial private companies accounted for 213.4 percent of GDP in 2018, well above the global average for the same period. And according to our studies, the use of liabilities for capital market investments is a key explanatory variable for the high debt burden of China’s non-financial listed companies.
The regulatory supervision of Ant shows that the government is consciously controlling the pure capital game, hoping that finance will be hew more closely to the production and operation of the real sector and play a role in supporting small and micro businesses development. This will be a long-term and stable trend.
Second, the regulatory authorities are trying to clarify the relationship between traditional banks and fintech companies.
An analysis of the prospectus shows clearly that Ant Group is still a broker, and its process of making profits is not much different from that of traditional banks. Ant has adopted some new channels and technologies in the process, including making joint loans with traditional banks and using big data to rate the risk of customers, but Ant still collect deposits, uses the deposits to make loans, and profits from the interest margins, just like traditional banks do. There is no reason that the same business should not be regulated in the same way.
Under new rules issued by Chinese regulators, Ant’s capital contribution to a joint loan shall not be less than 30 percent. In addition to the requirements of registered capital and deposit insurance, Ant Group will be subject to similar supervision as a traditional bank, which will increase the cost of risk control. Ant may be forced to give up part of its businesses as a result. The new regulation levels the playing field for fintech and traditional banks, while also establishing a more systematic framework for financial risk prevention, which is conducive to more favorable business environment.
Third, the new regulation achieves a balance between encouraging innovation and preventing risks.
On one hand, regulation needs to control emerging economic behaviors to avoid overall risks. On the other hand, regulators need to encourage innovation and keep the field dynamic, which contributes to higher total productivity. Many factors come into play in the regulation balance, but the stage of economic development is an overwhelming factor. When a country is in a take-off stage, or in the process of moving from autarky to free trade, whether the business environment is free, open, and constraint-breaking is an urgent issue. When a country enters a sustainable stage, meaning a stable growth rate, accumulated experience, sufficient capital stock, and so on, the regulatory authorities usually pay more attention to the certainty and consistency of the business environment.
In general, China’s regulation of Ant Group is good news for investors in the long run. It will contribute to stabilizing expectations and creating a favorable business environment, although it is not a liberalization policy in the traditional sense. In the context of financial openness, China will become the choice of more foreign companies and investors.
（本文發表於 The Diplomat 2020年11月20日。原標題爲“The Long-Term Implications of Ant Group’s Delayed IPO”）