What Ant’s IPO Flop Means for China’s Consumer Finance Industry

The China Guys
Dec 3, 2020 · 10 min read
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Summary

In the run-up to Ant Financial’s behemoth IPO, the fintech giant’s suspiciously light balance sheet triggered the release of draft rules by Chinese regulators that would significantly impact the firm’s operating model. Consequently, Ant’s IPO was delayed, and investors went home disappointed. While regulators’ concerns were not unfounded, the consequences of these new regulations resurface big questions about the future of China’s consumer finance industry.

Ant’s Rise in Online Consumer Finance

It is difficult to overstate the dizzying pace at which the Chinese fintech space has revolutionized how consumers save, invest, spend, and borrow. A range of financial services now allow Chinese consumers to manage their financial lives from anywhere in the world. The widespread adoption of smartphones, the advent of big data analytics, and the rise of blockchain technology led to the proliferation of fintech companies with access to the vast Chinese market and a better understanding of their customers’ behavior. The consumer lending arms of fintech companies went through several boom and bust cycles, ultimately producing a consolidated market with one company in particular, Ant Group, as its undisputed leader.

Government Support for Consumer Finance

A key piece of the online consumer finance puzzle is government policy. Given Beijing’s central role in managing the economy, this should come as no surprise since few industries can truly thrive without the backing of the state.

Why Did Beijing Come Down on Ant Financial?

The unexpected hold on what would have been an IPO of historic proportions has left investors scrambling for explanation. Francis Lun, CEO of GEO Securities, offered a cynical explanation, claiming that Beijing came down on Jack Ma for his harsh rebuke of regulators. This sentiment has been repeated in mainstream Western media outlets with a CNN headline claiming that “Beijing just yanked Ant Group’s IPO to show Jack Ma who’s really in charge.”

The Basis for Limiting Leverage

For years, the rapid growth in Chinese corporate leverage led to speculation about the possibility of a giant debt bubble fueled by Beijing’s investment-driven economics. Even before the pandemic raised global indebtedness, corporate debt in China stood at an atmospheric 150% of GDP (US corporate debt, by comparison, stood at 70% of GDP). However, much of this debt is concentrated in SOEs that are unlikely to default thanks to virtually unlimited government support.

Attracting foreign companies

Another incentive Beijing has for eliminating systemic risk from the financial sector is the ability to attract foreign capital. The most recent addition to President Xi’s panoply of national strategies, dual-circulation, aims to substitute high-tech imports and export markets with domestic alternatives while taking advantage of foreign capital to finance the transition. To attract foreign capital, Beijing has removed the minimum asset requirements to enter the Chinese market, lifted limits on foreign ownership, and cut through red tape so that permits are issued to foreign financial institutions (FIs) on an accelerated timeline.

Ant’s Business Model: Light on Risk

Ant’s CreditTech services have a total consumer credit balance of CN¥1,732 billion. However, its IPO prospectus only lists CN¥36,242 million in its loans receivable. This means that only 2% of the loans that it originates actually appear on its balance sheet. Where do the other 98% of the loans go? According to the prospectus, they are either “underwritten by our [Ant’s] partner financial institutions or securitized.”

Too Big to Fail

Furthermore, Ant’s estimated valuation of US$313 billion is 20% of China’s current outstanding consumer debt of US$1.4 trillion. This raises another concern for regulators — that Ant may well become too big to fail in the vein of US banks after the housing bubble burst. Cognizant that the government would likely step in to prevent a string of insolvencies creates yet another inspiration for risky behavior. While Ant points to its customers’ low loan delinquency rate — roughly 1% in 2019 — regulators prefer to look at the set incentives likely to influence the company’s future behavior. And the dual-risk of being both too big to fail and a major catalyst for unsustainable leverage casts Ant as a major systemic risk in the eyes of the regulator.

Fallout, New Rules, and Next Steps

Ahead of the IPO’s termination, Chinese regulators released a draft for new regulations that ultimately knocked Ant off the waiting list for the Shanghai and Hong Kong exchanges. Several of the new rules would have forced a change to Ant’s business model, but one in particular caught the eye of investors. According to the proposed rules, “In a single joint loan, the proportion of capital contribution of a micro-credit company operating a network micro-credit business shall not be less than 30%.” In other words, Ant, which currently passes on most of the risk for the loans it originates, would have to bear at least 30% of loan value. This would severely reduce the volume of loans that it can securitize to raise cash that is subsequently used to issue more loans, which is the primary driver of its revenues. Under the new model, Ant would still be profitable albeit not at levels to justify anywhere near a US$313 billion valuation. The new rules, in other words, treat Ant less like a technology company, which it claims to be, and more like a run-of-the-mill bank.

The Startup

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The China Guys

Written by

Stay in the know with TCG’s fresh perspective on China’s economy, business environment, and political landscape.

The Startup

Medium's largest active publication, followed by +754K people. Follow to join our community.

The China Guys

Written by

Stay in the know with TCG’s fresh perspective on China’s economy, business environment, and political landscape.

The Startup

Medium's largest active publication, followed by +754K people. Follow to join our community.

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