CNBC reported that Ant Financial (蚂蚁金付) at the time it was about to list was the world’s largest fintech company and was valued at over USD 313 billion and raising over USD34.5 billion. Had it listed on the Hong Kong and Shanghai stock exchanges, it would have been the world’s largest IPO. Ant Financial was one/third owned by Alibaba and controlled by Jack Ma. Many views have been offered as to why the IPO was ordered to be halted by the various regulators and this article will cover some of the regulatory related concerns that have arisen from this IPO cancellation.
#1: An Overview of the Business Model of Ant Financial (蚂蚁金付)
Its initial business model when it stared out was a pure clone of Paypal’s payment services model where it was processing the ecommerce payments arising out of Alibaba’s platforms. Later the larger more profitable business model for Ant Financial was to provide lending services to the small merchants on the Alibaba platform and the claim was that Ant Financial was able to administer this lending easily using artificial intelligence. Ant Financial managed to structure the lending platform until it only came out with 2% of the loan principal and balance came from its network of 50 partner banks came up with 98% of the loan principal or was securitised.
Beijing has proposed a joint lending model where internet platforms should fund no less than 30% of total loans in the loan book.
#2: An Overview of the Basel Accord and Central Bank Policy Worldwide
Despite what Jack Ma said at his speech at the Bund Centre (before the failed IPO), the Basel Accord is a key pillar that underpins global banking worldwide so just because he was an “Internet platform” once his operations grew too large, this internet platform would become a big risk in the PRC financial system.
What is the Basel Accord you may ask? This was the internal banking accord agreed between the large nations and the global financial institutions after the US ditched the gold standard. This agreement was that all the banking and financial institutions need to maintain sufficient capital adequacy based on certain ratios to maintain the global financial order.
Fintech firms usually argue that they are technology firms and not financial institutions so they should not be required like banks to put up capital adequacy. But what we see in the Ant Financial case was that the Peoples’ Bank of China took the view that if Ant Financial was allowed to list, it would have sufficiently large capital base of 2% to raise a loan book of 98% which will have a really large impact on the PRC debt market.
#3: Why the People’s Bank of China Intervened in Ant Financial
The Peoples’ Bank of China (PBOC) is the central Bank of China and is based in Beijing.
Some reasons why I think the PBOC halted the Ant Financial IPO was that:
The major policy banks may have complained to the PBOC about Ant Financial (蚂蚁金付). The possible complaint was that it was not so fair that the banks were made to comply with such strict capital adequacy rules while the Ant Financial group managed to run such a lending business with only a 2% capital base backing its huge loan book.
The implication of this was that if Ant Financial Raised USD34.5 billion (2%), then the total loan book that Ant Financial could wield would be 1,725 billion which would have dwarfed the loan books with most of the large major banks in China.
Another problem with this was that this whole loan book if it exploded (or if the promised AI credit rating system failed) would mean that Ant Financial would become the single largest failed counterparty in the whole of China and bring down the financial system in China and cause a hue default outside of China.
In conclusion, Ant Financial had a very good deal going for it before its IPO but because Jack Ma thought he could run the largest fintech in China without complying with capital adequacy rules, this alarmed the Central Bank and they halted the IPO for Ant Financial and imposed capital adequacy rules on Ant Financial which is a good thing and prevent reckless lending and the risk of default causing a contagion effect across all the financial institutions in China.
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