China’s financial technology giant Ant Group, the highest-ever listing of nearly $35 billion, was abruptly halted Tuesday night (Nov. 3), causing market consternation.
In this regard, some financial scholars analyzed, this represents China’s network micro-lending (Internet micro-lending) industry regulations will soon be on the road, may affect the future of the Ant Group’s operating model. They predicted that once the ant into regulation, its business may be limited to shrink, when the possibility of downward adjustment of the company’s valuation also greatly increased, so the ant even after half a year to re-list, investors after a cooling-off period, the ant’s share price of the chase should be unlikely to be as hot.
In an interview with the Voice of America, Lu Suqi, deputy director of the finance department at Peking University School of Economics, said he believed that the Shanghai Stock Exchange called off the ant’s listing in the Shanghai stock market because the ant did not fully disclose to investors the impact of the Interim Measures for the Administration of Network Microfinance Business on the company in its listing roadshow (road show), which indirectly underestimated the company’s future operational risks, and caused investors to frantically subscribe to the new shares in the past week and exaggerated its possible valuation after the IPO.
Ant valuation does not reflect the impact of the regulation of online small loans
The China Banking and Insurance Regulatory Commission (CBIRC) and the central bank had finished drafting the Interim Measures for the Administration of Online Microfinance Business in early May this year, and announced on Monday (Nov. 2) that they had entered the public comment phase. It is expected to enter the next stage of legislation or implementation a month later, that is, on December 2, after the deadline for feedback from the public.
According to this measure, future online loans to individuals cannot exceed RMB 300,000 or one-third of their average annual income for the last three years. Loans to business entities or organizations cannot exceed RMB 1 million. The one-time paid-up registered capital for operating an online lending company must not be less than RMB 1 billion, and the minimum capital amount will be raised to RMB 5 billion if the company operates across provinces. In addition, in a single joint loan, the measures also stipulate that the proportion of capital contribution of microfinance companies shall not be less than 30%, in all show, the future of the network of small loans, the amount of capital contribution and leverage will be strictly regulated and restricted.
As the leader of China’s mobile payment and online microfinance institutions, Ant’s future business model will be greatly limited by the regulations, Lu Suqi said. If Ant goes public before the regulations come into effect, he said, investors who buy shares now at a premium may pay a price for the future of its waist-high share price.
The company’s main business is to provide a wide range of services and products to the public.
Ant Group was expected to issue a total of 3.4 billion shares (about 11% of the company’s total holdings) on both the Shanghai (A-share) and Hong Kong (H-share) stock markets on Thursday (Nov. 5), which could raise a total of more than US$34.4 billion in public funds under the premise of pricing each share at CNY68.8 (US$10.28) and HKD80 (US$10.32), respectively, which would also then bring Ant’s total post-IPO The valuation pushed up to over US$310 billion, well above the market capitalisation of China’s largest bank, ICBC (about US$270 billion).
At the stage of IPO subscriptions over the past week, the market was rumoured to be calling for HK$120 per Hong Kong H-share on the dark market at one point, representing a 50% premium. In addition, Shanghai’s A-shares were more than 870 times oversubscribed, meaning investors with cash in hand might not even be able to buy the new shares.
That excitement has now come to an end with the halt of the ant IPO case. However, according to a Tencent First Line report, Ant Group Chairman Jing Xiandong remained optimistic during an emergency mid- to high-level meeting Tuesday night, saying that the company would re-list as soon as possible after meeting the regulator’s requirements, though the re-listing could be delayed by 6 months.
Ma’s reapproval of financial regulation stirring debate?
As ant founder Jack Ma in late October on the Bund in Shanghai at the financial summit criticized the Chinese banking sector on the loan to be collateralized by the “pawnshop mentality”. He also claimed that “China’s financial system, there is no systemic risk”, but also criticized the Basel Accord is outdated “old man’s club” to develop risk standards.
It is widely believed that Ma’s comments annoyed China’s regulators, which triggered Monday’s announcement of “Interim Measures for the Administration of Network Microfinance Business” and the interview of him and two other Ant executives by China’s central bank, the China Securities Regulatory Commission, the China Banking and Insurance Regulatory Commission and the State Administration of Foreign Exchange on Monday.
Peking University School of Economics, deputy director of the Department of Finance, Professor Lu Suiqi said Ma’s words on behalf of the Ant Group behind the mood of shareholders eager to cash, but “too ugly”, because, financial technology and how to create innovation are still private interests, but financial regulation to protect the public interest, non-negotiable.
He said that the ant is engaged in the business of financial services, but because of the identity of the technology company to circumvent financial regulation, first of all, the other bank counterparts are unfair. Moreover, if the ants are big, its business model if not restricted, the ants can increase leverage, crazy arbitrage, the same as the potential risks left to the entire banking system and society.
Lv Suqi said, if all the Chinese enterprises to follow the ant group unregulated routine to play, the impact on the Chinese economy will be disastrous.
Rui Meng, a professor of finance and accounting at China Europe International Business School, said the ant listing case is just a setback in the schedule and should be re-listed after meeting the requirements of the regulatory unit. However, he also agreed that the ant’s loan business is indeed too highly leveraged and full of risks.
As the government document explains, the potential risk is excessive lending,” Rimeng told VOA. Because, with only 3 billion (yuan) of capital, Ant is engaged in over 300 billion (yuan) of lending, which (100 times) is too highly leveraged.”
Rimeng said whether Ant will be reclassified as a financial stock in the future remains a market rumor. However, in case China’s securities regulator decides to remove Ant’s status as a technology stock, its future listing on the Shanghai Science and Technology Board could set off further uncertainties and waves.
China’s online lending is over-leveraged
Professor Zhu Haomin of the Department of Finance at National Chengchi University believes that financial technology has indeed brought innovative thinking and made up for the shortcomings of the traditional financial industry, especially in the goal of inclusive financing, so that small and micro enterprises or consumers that were not served by the financial industry in the past can benefit from it.
However, he said, China’s previous P2P (peer-to-peer) online lending incidents, such as the collapse of rolled-up funds or misappropriation of funds and other mine incidents, means that small online lending implies great financial and social risks, including excessive lending and improper control of financial risks, which is impossible for financial regulators around the world to sit idly by, which is why China now has to propose management methods for this new type of business, such as online micro-lending.
China’s P2P lending refers to online platforms that help match investors with deposits to borrowers with loan needs. During its heyday in 2018, the total loan size of more than 6,000 online lending businesses across China had been as high as $218 billion, according to the media outlet Business Insider. However, after a wave of closures popped up and after two years of consolidation by the China Banking Regulatory Commission (CBRC), investors had lost more than $115 billion in total as of August this year.
How to strike a balance between innovation and regulation is the big challenge facing China’s regulators now, Zhu said. In particular, Ant has also recently been rumored to be involved in violations of lending limits and cross-province lending, all of which make it impossible for Chinese regulators to sit idly by.
He said that if the ants are allowed to continue to grow, then there will be “too big to fail (too big to fail)” risk, that is, because of its size, if something goes wrong, the consequences will be unimaginable.
According to the ant’s prospectus, as of June 30 this year, the ant platform contributed to the amount of credit loans to consumers and small and micro e-commerce reached 1.7 trillion yuan (253.3 billion U.S. dollars) and 400 billion yuan (60 billion U.S. dollars), respectively. In addition, Alipay, a subsidiary of Ant, has more than 700 million active users each month and serves more than 80 million micro and small e-commerce merchants and more than 2,000 financial institution partners. In the 12 months to June 30 this year, the total payment transactions handled in China exceeded 118 trillion yuan ($17.6 trillion).
However, Zhu said that no matter how risky Ant’s business was, China’s securities regulator should have assessed those risks when reviewing its listing case before allowing it to go public. Therefore, until two days before the listing only temporarily because of these long-standing risks and called off the ant’s listing case, but also reflects the color of China’s capital market rule of man, damaging its international reputation.
Zhu Haomin said: “The development of mainland China’s capital market is only 20-30 years of light, the so-called rule of man is still very strong, may be some of the system outside of human considerations rather affect the operation of the system, so, I personally think, it suddenly called off this time to its capital market reputation is hurt.”
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