Chinese regulators stunned financial markets on Tuesday when they slammed the brakes on Ant Group's highly anticipated initial public offering just days before its shares were scheduled to start trading in Shanghai and Hong Kong. Ma's financial tech firm was set to raise $37 billion and become the biggest share sale in history.
The Shanghai Stock Exchange said in a late night statement that it had postponed the Ant Group IPO because of "major issues" that might cause the company "not to meet the listing conditions or disclosure requirements." That came after the Chinese central bank and other Chinese government officials called in Ma and Ant Group executives for talks Monday.
The Shanghai bourse is "fulfilling its responsibility of self regulation," Wang Wenbin, spokesperson for China's Ministry of Foreign Affairs, told reporters on Wednesday. "It is a decision made to better safeguard the capital market stability and protect investors' rights and interests."
It's not yet clear if or when the IPO will resume. Ant Group said in a statement that it would stay in "close communications" with regulators and the Shanghai exchange.
But the unprecedented intervention serves as a cautionary tale for Chinese entrepreneurs with lofty ambitions, even Communist Party members such as Ma. It also means that even if Ant satisfies new regulatory requirements, its massive business will only move forward under the watchful eye of China's strict regulators.
'The tallest nail gets hammered down'
Investors are already wary about what it could mean. Shares in Alibaba (BABA), the e-commerce giant that Ma co-founded, plunged 8% in New York on Tuesday.
The plunge wiped more than $68 billion off Alibaba's market value, based on the value of shares in New York.
"There's a saying in China: 'The tallest nail gets hammered down,'" said Duncan Clark, author of "Alibaba: The House that Jack Ma Built" and founder of investment advisory firm BDA China. And it would seem Ma just got hammered by the Chinese government, he said.
The Shanghai Stock Exchange's announcement comes just over a week after Ma said avoiding systemic risk is important, but publicly criticized Chinese regulators for stifling innovation by being too risk averse.
"What we need is to build a healthy financial system, not systematic financial risks," the Ant Group co-founder said at a conference in Shanghai. "To innovate without risks is to kill innovation. There's no innovation without risks in the world."
On Monday, Chinese regulators summoned Ma and other Ant executives to conduct what authorities called "regulatory interviews." Ant Group said that the two sides exchanged "views regarding the health and stability of the financial sector."
Ma's comments "clearly didn't resonate in the halls of power in Beijing," wrote Jeffrey Halley, senior market analyst for Asia Pacific at Oanda, in a note on Wednesday. "There's only one big boss in China, and it's not Jack Ma."
For the last few years, entrepreneurs like Ma were valued for helping China and the Chinese Communist Party achieve their greater goals by stimulating consumption and driving efficiency, according to Clark.
But lately, Chinese President Xi Jinping and the party has made it clear that private companies are on a tighter leash. In September, the party published an unusually frank set of guidelines that emphasized the need for "politically sensible people" in the private sector who will "firmly listen to the party and follow the party."
With the Ant announcement,"it seems that Xi's emphasis on state-owned enterprises isn't just talk," Clark said.
"The regulator is keen to reassert itself," he added.
Ant, an affiliate of e-commerce giant Alibaba, has inserted itself into every aspect of financial life for hundreds of millions of Chinese. It offers an array of products, such as digital payments through its popular app Alipay, instant credit and small loans, wealth management products and insurance products.
China's financial technology industry has "outpaced the ability of the regulators in being able to provide guidelines especially in the online co-lending business and pure loan facilitation," Jefferies analysts wrote in a Wednesday research note.
But it now looks like Beijing is taking steps to correct that.
What remains unclear is whether Beijing is trying to tilt the balance of power back to state-owned banks, or if regulators are genuinely concerned and uncomfortable about Ant's lending practices, Clark said.
Rise of the Chinese regulator
One issue "is exactly which regulator, if any, has oversight" on Ant and other Chinese financial tech companies, according to the analysts at Jefferies.
China's Banking and Insurance Regulatory Commission — one of the regulators that summoned Ma and his team — proposed new rules on Monday for online lenders. The rules mean that Ant would have to set aside more cash for the loans it facilitates and would place more credit risk on its balance sheet, according to several analysts.
China's state-run media on Wednesday pointed to the tougher regulatory stance as a sign that authorities want to keep the country's largest tech companies in check.
"Financial Big Techs — increasingly seen as rivals to traditional banks — will inevitably be subject to more supervising curbs," reported state-run tabloid The Global Times reported, citing experts.
State-run news agency Xinhua was definitive in its assessment: "Each participant in the market must respect the rules, and no one can make exceptions."
Clark, of BDA China, said that Ant may have also been "a victim of its own success."
The IPO would have valued the company at more than $310 billion, more than major US investment banks such as Goldman Sachs (GS) and Morgan Stanley (MS). And there was huge demand for shares in Shanghai and Hong Kong, with the Shanghai leg of the IPO more than 870 times oversubscribed.
That likely made Chinese regulators nervous, according to Clark.
"Once this company was public, would they be able to control it, and the lending that it would be making?" he said.
Will Ant's IPO eventually get the green light?
It is "unfortunate timing" that Ant got caught up in China's regulatory changes, said Hao Hong, managing director and head of research at investment bank Bocom International. But he still expected Ant to revive its plans to go public.
"Ant will need to regroup and [retry] the IPO in about six months," Hong said. "In the end, the IPO will go through."
David Erickson, finance lecturer at the University of Pennsylvania's Wharton Business School and former co-head of global equity capital markets at Barclays, agreed.
"There will likely be some resolution that involves an amended filing that ultimately leads to an IPO," he predicted.
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