How Ant can rise again after that IPO shock

By Tim Culpan

Ant Group Co. will survive the 11th-hour suspension of its blockbuster $35 billion listing in Shanghai and Hong Kong if the company can learn from its technology peers.
If there’s one thing that founder Jack Ma and Chinese regulators probably agree upon, it’s that finance and technology make for a powerful combination. The mix is where they ran into trouble. Halting the initial public offerings due to a “change in regulatory environment” is the government’s way of asserting that Ant is more fin than tech. Ma and team won’t get away with being digital cowboys riding roughshod over the financial system.

Alibaba Group Holding Ltd., which owns a third of Ant, took an immediate hit Tuesday, falling by a record 9.7% for its New York-listed shares. It was down as much as 9.3% Wednesday in Hong Kong.

Read | Ant Group: China's fintech flyer grounded by regulators

Making too much money may not be the real sin — as Deng Xiaoping famously stated, to get rich is glorious. But having too much power over the nation’s financial levers intrudes on government territory. China’s state-owned banks are a policy tool. Not only does Ant control a growing payments platform, Alipay, but its loans and wealth management businesses have climbed to dominate their rivals.

China's financial regulator plans to discourage lenders from using Ant's platforms, which act as a conduit for loans from banks to consumers, Bloomberg News reported Wednesday, citing people familiar with the matter whom it didn't name. On the surface, that looks really bad. Yet ensuring banks comply with new rules is what we'd expect from a regulator and puts pressure on Ant's executives to quickly bring its own business model into line.

As my colleague Shuli Ren pointed out, comments Ma made last month at the Bund Summit in Shanghai seem to have led to the suspension. He compared China’s banks to pawn shops demanding sufficient capital to back loans. Ant’s model is famously different, relying instead on reams of customer data to manage risk. Ma described the financial system as following rules designed by a club of old people, and said the country needs “policy experts, but not experts in red tape.”

The path forward seems clear. Rather than shut Ant down, or scuttle the IPOs altogether, Beijing is likely to force important changes to its business model.

Tencent Holdings Ltd. and Baidu Inc. know how this works: reflect, repent and renovate. They got past regulatory hiccups by coming out more patriotic than ever. To understand what Ant could look like after the dust has settled, let’s consider Beijing’s longer-term goals.

One is to roll out a central bank cryptocurrency. As my colleague Andy Mukherjee has outlined, the rise of fintech in areas such as money-market funds and wealth management has led to risk accumulating in shadow banking. One of the government’s strategies behind a digital token is to level the playing field back toward traditional lenders, who have been trailing technology in other ways. Expect Ant to embrace this virtual yuan-backed currency.

Another goal is to expand the surveillance state, where data informs every aspect of daily life. The more questionable uses involve tracking individuals, cracking down on dissent, and enforcing standards of behavior. Yet keeping a digital footprint of the economy can lead to efficiency in allocating capital, lending money, and even managing supply chains. Fintech proponents make this argument when they say that the new system needn’t follow old rules.

Ant and Beijing are likely to meet in the middle. Regulators outlined new draft rules for the sector this week that include Basel-style capital requirements. As a result, Ant would need to provide at least 30% of the funding for loans it makes. That figure is currently closer to 2%, with the capital requirement equal to around $14 billion, according to estimates by Jefferies analysts Shujin Chen and Alfred He. While possibly a slight drag on profit, this shouldn’t trouble Ant, given the IPOs were set to raise 2.5 times that number.

We may also see Ant provide regulators with greater access to its data, as a way to prove that its model can better manage risk while teaching them how things are done. In return, Beijing will have greater access to information it can use to build a broader model of the economy and its citizens.

A final change is likely to be Jack Ma himself. Companies often talk about key-man risk in terms of how the business may suffer if the linchpin executive departs. For Ant, this problem is reversed: Ma hanging around could be the liability.

China’s second-richest man had already stepped away from Alibaba after taking too much of the spotlight away from political leaders. He no longer has any official position at the e-commerce behemoth. Yet he holds voting control and a significant stake in Ant. As with Alibaba, Ma is likely to put his vast holdings into a philanthropic trust, set up charities and think tanks, and retire from public life.

Ant could then rise from its IPO ashes like the patriotic fintech phoenix that Beijing ultimately wants.