Use Ant Group’s IPO Suspension to Reflect on Its Social and Market Valuations

Release time：2020-12-03     information sources：Fudan Financial Review

Shang-Jin Wei

Academic Visiting Professor of FISF

Editor-in-chief of Fudan Financial Review

Professor of Finance and Ecnomics of Columbia University

Ant Group, a Chinese FinTech conglomerate known for its digital payment plus a digital supermarket for other financial services, has met a regulatory setback - its simultaneous public listing on the Hong Kong and Shanghai Stock Exchanges originally scheduled for November 5 has just been suspended by Chinese regulators. The suspension is an assertion of authority and an expression of unhappiness by the regulators, possibly in response to a recent speech by Jack Ma, Ant’s controlling shareholder, who was critical of financial regulations that in his mind show insufficient understanding of and insufficient support for FinTech innovation.

The IPO was to be the largest in history, surpassing that of the previous IPO record holder Saudi Aramco ($29.4 billion when first listed last December), and Ant’s first cousin Alibaba ($25 billion on its New York Stock Exchange debut in 2014). Based on Ant Group’s IPO prospectus, the company aims to raise $34.4 billion (for about 11% of its shares). With a total market valuation projected at $313.4 billion, Ant would be ranked the third largest among Chinese listed companies and the 12th largest public company in the world, surpassing JPMorgan Chase, which is currently the most valuable publicly listed bank in the world.

Will Ant still break the world record if and when its IPO is resumed?  If the suspension is accompanied by new regulatory restrictions on its business activities, its market valuation can certainly dampen, but Ant has also demonstrated creativity and tenacity many times in its short history. By leveraging the popularity of its digital payment App in China, it has expanded successfully into selling mutual funds, insurance products, and a range of other financial service products. Besides the growth potential in each of its current businesses, Ant has numerous other growth opportunities.

For example, Ant has in-house algorithms to generate informative scores on credit risks for digital-payment users, including but also extending beyond those who shop or sell regularly online. Credit scoring, when permitted by China’s regulatory authorities, can be a standalone new business with potential demands from supply-chain firms, landlords, banks, and prospective employers.

Overseas expansion is another potential growth area. Compared to the company’s dragon-sized dominance in domestic e-finance, it is still an ant outside of China. Take digital payment as an example, its overseas business volume is only 0.5% of its domestic volume.  With its powerful algorithms and technical know-how, however, it should be able to find market demand in many other countries, especially if it can gain the trust of foreign regulators and piggyback on Alibaba’s own international expansion.

Ant still faces many potential headwinds. First, the United States and India’s recent restrictions on Chinese companies are reminders that its ultimate overseas success may depend on geopolitical dynamics beyond its control. Second, and more importantly, China’s own domestic regulators will have a huge impact on how much Ant can grow and expand into new businesses. Like US and EU regulators with respect to their own BigTech companies, Chinese authorities are concerned about Ant’s near-monopoly position in digital payments, as well as the unforeseen risks to financial stability and data privacy that it poses.

These concerns must be weighed against the value that the company and fintech innovations offer to society. One cannot make general statements as some innovations could widen a gap between technological haves and have-nots. In the case of Ant, however, it has demonstrated to be a force for financial inclusion in the economy. Its technology has made loans accessible to millions of small and micro enterprises that previously could not borrow, owing to a lack of collateralizable assets – including in China’s poorer, marginalized regions. Ant also promotes gender equality in entrepreneurship. While men outnumber women three-to-one among offline entrepreneurs, there is near gender parity among online entrepreneurs, and women-led firms are helped by Ant’s merit-based, gender-blind loan program.

Ant is also an unsung hero in liberalizing interest rates in China. Interest and exchange rates are arguably two of the most important prices in any economy, and before the fintech revolution, China imposed a cap on the interest rate paid to depositors (together with a floor on the lending interest rate), which meant that households were earning a return on their savings below the market interest rate. It is said that the low interest rate is one reason for the high savings rate in China (more savings are needed to achieve a given monetary target), which contributes to a large current account surplus. Although paying market interest rates on household savings would enhance economic efficiency and potentially reduce China’s external imbalances, reforms to achieve that result are difficult to implement, because commercial banks that benefit from low deposit interest rates have scant incentive to change, and interest rate regulation had prevented individual banks from deviating from the status quo.

Ant changed all of this in June 2013 when it introduced Yuebao, an easily accessible money-market fund that pays a market interest rate. By allowing for almost instantaneous purchase and redemption from its digital and a low starting investment (¥1), Yuebao offered millions of ordinary households a financial service never experienced in their economic life, making them realize that they need not tolerate the low interest rates of banks. In my own research (with Greg Buchak of Stanford University and Jiayin Hu of Peking University), we have found that Yuebao triggered a de facto financial liberalization across China, by putting pressure on banks to roll out their own low-entry barrier, low-cost, and market-rate-paying products.

Ordinary Chinese consumers now enjoy banking services of a quality and on a scale that would have been unthinkable before this silent revolution in the country’s financial services that Ant has help to facilitate. Beyond applying socially beneficial competitive pressure, Ant also helps many banks expand their own business and improve their efficiency through cooperative joint-lending agreements. These arrangements combine a bank’s low cost-of-capital advantage with Ant’s data- and algorithm-driven approach to risk and cost control. With 100 such partnerships in operation, Ant has discovered and delivered many creditworthy borrowers that were previously invisible to the banks and/or too expensive to serve. Better yet, the default rates on these loans are often lower than banks’ own lending programs.

Most of the social benefits stemming from Ant’s expansion come as a by-product of the company’s profit-seeking activities. This is not a bad thing as it makes them sustainable. A big line of Ant’s business is personal loans, which can help households better manage temporary income or expenditure shocks, say for illness or education. One concern is that greater availability of such loans could result in financially unsophisticated people taking on too much debt, or otherwise exacerbating their “behavioral biases,” thereby creating greater financial instability.

However, these concerns tend not to be based on systematic evidence. More research and evaluations in this area thus would help to ensure that Ant – and fintech innovation in general – can progress in ways that are good not just for financial investors but for society at large.