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Inside the messy meltdown of Jack Ma’s $ 35 billion IPO

(Bloomberg) – Mid-level bureaucrats left China’s richest man waiting while they prepared for a meeting that would send shock waves across the financial world.

It was Monday morning in Beijing, and Jack Ma was called into a conference room at the China Securities Regulatory Authority just days before he was appointed to the Ant Group Co going public on the largest stock market ever.

When bureaucrats finally showed up, they skipped the compliments and delivered an ominous message: The Ayatha days of comfortable government oversight and minimal capital requirements are over. The meeting ended without discussing Ant’s IPO, but it was a sign that things may not go as planned.

The subsequent collapse of the $ 35 billion stock sale has plunged Ma’s fintech giant into turmoil, providing a stark reminder that even China’s most famous businessman is not immune to the whims of the Communist Party that has tightened its grip on the world’s second largest economy under Xi Jinping leadership.

Among the questions that remain as international investors try to understand the 72 Hours of Chaos: Why is China spoiling Ant’s IPO at the last minute after months of careful preparation? What does the future hold for one of the most important state companies?

Interviews with Ant regulators, bankers and executives provide some answers, although even insiders say only China’s top leaders can trust what will happen next. Most of the people who spoke about this story did so on the condition of anonymity to discuss sensitive matters.

A meeting in Beijing on Monday sparked a behind-the-scenes struggle by Ant and its bankers for more visibility from Chinese regulators. While CSRC officials indicated at the time that they were unaware of any changes to the IPO plans, the regulator’s encrypted social media post later that day posted a “supervisory interview” with tongues swaying from Hong Kong to New York.

By Tuesday afternoon, the mood was sour as whispers of delay began to spread in Shanghai. At around 8 p.m., the city exchange called the city to say that the IPO would be suspended.

When the official statement arrived less than an hour later, it indicated a “significant change” in the regulatory environment but provided few additional details about why authorities had canceled the listing two days before shares were expected to start trading.

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In a hastily-arranged meeting between Ant and CSRC bankers later that evening, officials indicated the company’s need for more capital and new licenses to comply with a raft of conglomerate regulations that took effect at the start of November. There was no discussion of how quickly the IPO could restart.

A spokesman for You said that the need for more capital and new licenses was not discussed at the meeting but declined to elaborate.

One concern among regulators was that the stricter rules may not have been fully disclosed in the Ant Newsletter. On top of the new financial conglomerate regulations, the government on Monday released stringent draft consumer loans rules that require Ant to provide at least 30% of financing for loans it guarantees to banks and other financial institutions. Ant currently funds only 2% of its loans, with the remainder either taken by third parties or packaged as securities.

Several officials said it would be better to stop the listing at the eleventh hour than to let it go ahead and expose investors to potential losses.

The sentiment was shared by at least one corporate finance director, who said he had practically questioned an Ant CEO for an IPO allocation during a meeting at the Mandarin Oriental Hotel in Hong Kong. Now that he has a clearer idea of ​​the regulatory risks, he is relieved that the stock sale has been postponed.

The CSRC said in a statement on Wednesday that preventing Ant’s “hasty” listing in a changing regulatory environment was a responsible move for the market and investors.

However, some China watchers have an alternative theory as to why the Xi government acted the way it did: it wanted to send a message.

Ma, a well-respected former teacher in China, faced an extraordinary amount of criticism in state media after he slammed the country’s financial rules for stifling innovation at a conference in Shanghai on October 24. His comments came after Vice President Wang Qishan – who is close to Xi – called for a balance between innovation and strong regulations to prevent financial risks.

“It appears that, intentionally or unintentionally, it has been challenging and openly critical of the Chinese government’s approach to financial regulation,” Andrew Batson, director of Chinese research at Gavekal Research, wrote in a report.

In the weekend leading up to Ma’s recall to Beijing, the Financial Stability and Development Commission headed by Vice Premier Liu He stressed the need to regulate fintech companies.

In one sign, authorities may continue to pressure Ant, people familiar with the matter said Wednesday that regulators are planning to discourage banks from using the fintech firm’s online lending platforms. Guiding strikes at the heart of Ant’s commission-based lending model, which generated nearly 29 billion yuan ($ 4.4 billion) in revenue in the six months ending in June.

In response to questions from Bloomberg, Ant said that any suggestion that banks would stop using their platforms was unfounded.

Some investors are preparing for rough times in both Ant and the rest of Ma’s business empire. Shares of Alibaba Group Holdings Ltd., which owns about a third of Ant’s company, fell more than 8% on Tuesday in New York, marking the biggest drop in five years. The recession reduced Ma’s fortune by nearly $ 3 billion to $ 58 billion, pushing him to the second place on the list of China’s richest people behind Pune Ma of Tencent Holdings Ltd.

The IPO disaster has also raised broader concerns about China’s commitment to transparency as it tries to attract international investors.

On Tuesday, confusion over the suspension sparked a flurry of calls to Ant’s bankers from bewildering money managers. The feeling of injury in some cases was stark: Just an hour or two before the suspension was announced, Ant’s investor relations team was still trying to confirm attendance at a post-IPO party in Hong Kong. One of the company’s largest foreign investors expected this incident to permanently damage confidence in the Chinese capital markets.

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It could also have spillover effects on Hong Kong, whose status as a major financial center has already come into question amid increasing interference from Beijing. Almost a fifth of the city’s residents by one estimate have signed up to buy Ant shares; Instead, many of those plotting to gain windfall in paying interest outlay were stuck on futile margin loans.

“The lack of transparency reminds us that the“ Chinese way ”remains fraught with problems, said Fraser Hui, author of Red Capitalism: The Fragile Financial Institution of China’s Extraordinary Rise.

As for Ant itself, the IPO suspension is unlikely to deliver a knockout. The company had 71 billion yuan in cash and cash equivalents as of June and is one of the most important system-wide Chinese enterprises. The last thing the authorities want is a destabilizing loss of confidence in a company that plays a major role in the country’s financial plumbing.

The most significant risk for Ant is a decrease in rapid growth pace and a high rating. New regulations in China will force the company to act like a traditional lender and to a lesser extent as a provider of lighter assets for technology services to the financial industry. Almost certainly this would imply a lower P / E ratio of the stock if it was finally listed.

Also on the horizon is the introduction of the Chinese central bank’s digital currency, which threatens to undermine Ant’s dominance in payments. This could have implications for the company’s other businesses as well. For example, the Ant credit platform uses a massive collection of payment data to assess the financial strength of borrowers who often lack formal credit records or collateral.

All of this would be bad news for shareholders raising Ant’s valuation to $ 315 billion – higher than that of JPMorgan Chase & Co, but it could suit organizers and party leaders who fear Ma’s creation will be too big and too quickly.

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