(Bloomberg Opinion) -- The rare activist moment staged byย China's central bank was too late and too crude.
For years, when it came to innovative business ideas, Beijing's stance has been to let them flourish โย there would always be room to regulate and rein things in later. Andย thus gig economy superstars blossomed. China's version ofย Uber Technologies Inc., DoorDash Inc. andย PayPal Holdings Inc. are even more ubiquitous than their U.S. counterparts at home.ย
The other side of the coin is that billions of dollars in paper gains can be made and destroyed within days thanks to regulatory whims. Here, Jack Ma's Ant Group Co. is a cautionary tale.
On Sunday, China's central bank released a statement sayingย that Ant has โlittle legal awareness,โ โdespisedโ regulators' compliance requirementsย and engaged in antitrust behavior. Ant needs to go back to its core payment business, the People's Bank of China said.ย
In the first twoย trading days since then, Alibaba Group Holding Ltd., which owns roughly one-third of Ant, lost over 15% of its market value. Even before the PBOC's interference into Ant's business models on Sunday, Alibaba's shares were whacked by aย terse, one-sentence announcement from Beijingย about probingย the company's antitrust behavior on Christmas Eve. Alibaba's Hong Kong-listed shares are entering the year-end just 1.4% away from being in the red.ย
That's a further blow to Ma, whoseย blunt words,ย likeningย China's financial system to pawnshops,ย cost him the world's biggest initial public offeringย in early November. Ant had been on track to raise $35 billion, with a valuation of more thanย $300 billion, until regulators pulled it two days before its trading debut.
The company's digital-payment business has become commoditized. The newer, faster growing consumer-lending operation, which the PBOC now seeks to limit, is Ant's high-margin cash cow. So even if the company can somehow regain Beijing's favor and look to go public again, its valuation will be questioned. Ant will no longer be China's MasterCard,ย but merely its PayPal, which has a lower market value.ย
As a longtime observer of Ant, I have often marveled that it ventured to become a public company at all, because it operates in such treacherous regulatory waters. In July, my colleague Anjani Trivedi and I wrote that its IPO would run the risk of exposing how volatile and unsteady China's financial regulations can be.ย A blockbuster listing felt almost too good to be true.ย
This isn'tย the first time Ant has had a run-in withย regulators. The PBOC noticed its flawed lending model as early as 2017. Back then, Ant wasย packagingย consumer loans into asset-backed securitiesย and selling them to institutional investors โย oftenย banks. The central bank,ย worried about the underlying quality of securitized products โย which had collapsed Lehman Brothers Holdings Inc. โย called a halt to that practice.ย
So Ant found another wayย to build its business.ย
Currently, Ant connects banks with consumers, and almost all of the loans it originates sit only on banks' balance sheets. With China being one of the most indebted nations in the world โย its debt-to-GDP ratio is edging close to 300% โย the PBOCย is justifiably worried about bad loans. By asking Ant to put in a capital buffer itself, as Sunday's statement implies, the central bank is essentially telling Ma not to get too clever.ย
But why is the PBOC making this public statement now? If only it had published a vaguely worded warning three months earlier, investors and bankers wouldn'tย have whipped up such frenzy over Ant's IPO and come out this disappointed.ย
The fact is, the PBOC does see problems, but often lacks the political capital to do anything about them.
Consider theย backdrop. Ant first sought a dual listing in July, when China's tech stocks were staging a bull run, even as the economy struggledย to recover from the Covid-19 lockdown. Back then, Beijing was fast-tracking unicorn IPOs, hopeful that a tech infrastructure build-out could stimulate growth. Granted, the PBOC stepped back from open-market operations as early as June, worried that earlier rounds of easing would spur speculative bubbles, but bureaucrats bit their tongues on Ant. President Xi Jinping didn'tย want to hear about risk control then.ย
Fast forwardย to December. China's economy has recovered, and curtailing debt once again tops Beijing's economic agenda. The 67-year-old Xi, who is virtually president for life, always wanted to deleverage China, because he doesn'tย want aย Minsky Moment to blow up during his lifetime. He started that campaign in late 2017 โ around the time the PBOC halted Ant's securitization of its microloans โ but got derailedย by Donald Trump's trade war and Covid-19. Now that both hurdles are gone, the risk managers at the PBOC have found their voice.ย
Of course, it should come as no surprise that China's central bank lacks independence. But that trait matters to global investors, who have piled into China this year because it's the only major economy growing in the pandemic era. Ant is a good reminder that Beijing's politics matter. A vaguely worded statement after years of inaction can wipe out billions of dollars in a blink. Ma's fiasco has turned into a farce, just as ESG investing turned a corner and became a major trend this year. For all the big investment houses rushing to enter China, it's perhaps time to step back and ask:ย is the country really ready for the global stage?
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
ยฉ2020 Bloomberg L.P.
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