What led to the fall of World’s Biggest IPO: Ma vs Xi
‘‘यदा यदा हि धर्मस्य ग्लानिर्भवति भारत।अभ्यूत्थानंमधर्मस्य तदात्मानं सृजाम्यहम्।।
This famous quote from Mahabharata means that whenever sin/chaos in the world would rise, I, Krishna, will come to earth to destroy the evil & establish the religion. You may be wondering what’s the relevance of this quote in this article. Well, Here the sin/chaos & the evil is synonymous with The Capitalistic Rise in Empire of Alibaba & Shri Krishna is the man himself — The protector — Xi Jinping. In the process of destroying the evil, Xi Jinping has led the collapse of the World’s Biggest IPO, Jack Ma’s Ant Group — $37 Billion (Saudi Aramco was $29 B), by slapping an anti-monopoly investigation on the group, halting its IPO plans. The interesting point is that Ant already had got approval to list on Shanghai Stock Exchange when Xi intervened to thwart Ma’s plans. Mind you, It’s the same Xi who kept the big 4 (Google, Apple, Facebook & Amazon) out of China and watered Chinese Internet companies like Weibo, We-chat & Baidu — China’s social media equivalent. Through this move, Xi has shown that though he has concocted German Shepherds to quash American bulldogs, the leash of those shepherds lies firmly in hands of The Dragons.
The Story:
Well, the story is the same. Striking the balance between Credit Management & Government regulation. For long scholars & economists have argued on Government intervention in a free market to ensure smooth functioning of the economy. The opponents say that too much regulation in Credit Industry would curb innovation as it would devoid the risk-takers of money, paralyzing their growth. The Pro-Regulation says without regulation the defaulters would take the system for a ride, creating chaos in the whole industry. Ultimately it boils down to establishing an equilibrium between regulation & the free market to thrive growth & flourish businesses.
Too much technicality for my mostly engineer audience. No worries. Let’s take you back a little bit. To understand this, you need to understand the importance of 1) Credit cycle in wealth & productivity enhancement 2) Importance of Regulation to check the Credit Bubble
1)The Credit Cycle:
To buy what they can’t afford, Borrowers go to Lenders to borrow money. Lenders charge an interest & lend money, resulting in an increase in liquid money in the economy & a subsequent increase in spending. As one person’s spending is another person’s income, The income rises & hence the demand. To cater to demand, the industry increases productivity & the cycle follows. There’s more than meets the eyes. As they say, there’s no light without darkness. There is no upside without a downside. As lending increases, Less credit-worthy borrowers start getting loans, resulting in rising in NPA(Non-Performing Assets). The debt to GDP ratio of an economy increases, increasing the commodity prices & subsequent rise in Inflation.
2) The Regulatory Cycle: This happens in two stages:
Stage 1) When the inflation rises, primarily affecting the service class, Social tension rises. As the government wants to continue to be in power, it intervenes by increasing interest rates & printing less money, resulting in less borrowing & fall in prices & stabilization of Inflation.
Stage 2) As the productivity decreases, unemployment increases. To check the unemployment government starts deleveraging. It basically happens in four steps 1) Increase Spending to increase jobs 2) Reduce Debt to increase Income to Debt Ratio 3) Increase taxes to redistribute money 4) Print Money to increase liquidity.
The two stages of the regulatory cycle results in an increase in productivity & again the Credit Cycle (explained in 1) begins. Credits →Increased Spending →Credit Bubble →Unemployment →Deleveraging →Credit(For details Click here !)
So where did this all start — CREDIT. Now imagine a society without ambition. No one would want to increase wealth, resulting in No Credit, No Credit Bubble, No Unemployment & No Govt. intervention. We all would live in a peaceful world. But then, where would be The Ambanis & The Bezzos of the world. You know this is not the reality. Hence the CREDIT.
But what if Govt. intervened more & started giving credits to only Creditworthy borrowers with adequate collateral & not small & medium growing businesses. Then NPAs would not rise & consequently, no Credit Bubble would form. No depression → No Deleveraging. But you know the downside, this would devoid the risk-takers of money & suppress their growth.
Now coming back to Ma vs Xi, this is what has been happening in China for the last 20 years. Though the Credit-GDP has largely remained the same, the NPA-Credit ratio has come down drastically due to the tightly regulated banking & securities sector. In an attempt to make banks risk free, Chinese regulators have started curbing risk-takers. As you know, there is no such thing as risk-free- innovation. Sometimes, managing risk down to zero is the biggest risk. Well, to sum up, A void was created in the Credit sector to fulfill the demands of budding entrepreneurs. Here come the Ant Financials. A company that started off in 2003 as an online Payment service, soon took off as a digital supermarket that facilitates anyone with credit, allows them to invest anywhere & provides Insurance to anyone with a mobile phone with Alipay on it. At present, The App has ~1 Billion users with 730 Million active users on monthly basis & The Ant is looking at a valuation of $200–300 Billion through dual listing in Shanghai & Hong Kong Stock Exchange. In short, The Ant group was threatening the very existence of Chinese banks & regulators by flourishing on the loose Fintech regulations in China.
The Dragon Roars: The Downfall:
Soon the regulators & the banks started noticing their fall in market share. They knew such Fintech startups are banking on regulators’ lack of innovation, risk-averse nature & regulation inefficiencies. Soon the regulators announced measures, such as the introduction of a Digital Currency & Contribution of at least 30% of loans to borrowers, that required The Ant to overhaul its existing business model from facilitator of loan to provider of loan.
While the Ant was already struggling with tightened regulations, the final nail in the coffin came when Jack Ma gave a speech at BUND Summit in Shanghai in November this year after Ant had got the official go-ahead with the listing. Ma declared that Collateral & warranties in the Chinese Credit system were like a pawnshop & it needed a shift in this digital age. These comments were a direct attack on the regulators & ultimately on the behest of Xi. On Nov 17, the government broke its silence on future plans for Ant’s listing. The regulatory body told a financial forum the listing “depends on how the [Chinese] government restructures the regulatory framework in terms of financial technology, and it also depends on how the company reacts to the changing regulatory environment.” And, the plans for the biggest IPO in the world were halted.
Ma has always been a visionary to look past the dull reality. He sow a seed called Alibaba when the Internet space was just emerging. Ma has also been a wonderful public face for China. He hosts international leaders, who make a special point of visiting Alibaba’s headquarters in Hangzhou for a glimpse of the internet’s future. At the end of the day, the suspension of the Ant IPO sends a chilling warning to numerous entrepreneurs about the dangers of becoming too conspicuous and too wealthy.
The Conclusion:
Imagine the MP (Member of Parliament) of your area coming in a Honda Activa. Funny right! Few might applaud the gesture, but it's unthinkable, rather ingestible. We all have fixated on the notion in our head that Politics is tantamount to Power. What good an MP is he if he himself is coming in Activa.
Be it Democracy or Communism, the power tussle & the muscle-flexing between the Lawmakers & The Corporates have been a deep-rooted phenomenon. But we all know, which side ultimately prevails. The Corporates might wear shiny clothes or come in flashy Mercedes, but in Politics, they will always have to bow to The Whites in Ambassadors.
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