- â€œThe purpose is to rein in Ma Yun,â€ said an adviser to Chinaâ€™s State Council, the countryâ€™s top government body, using Mr. Maâ€™s Chinese name. â€œItâ€™s like putting a bridle on a horse.â€
- â€œI think among the richest men in China, few have good endings.â€ - Jack Ma
Beijingâ€™s protracted dismemberment of Jack Ma Inc. continues.
â€œBridle on the horseâ€ hardly describes this orgy of value destruction. This â€œhorseâ€ has suffered multiple amputations, performed without finesse by the Chinese government. The Ma empire is worth half what it was 9 months ago.
The process is not over. Beijing is now doling out some of the most lucrative slices of Maâ€™s business to new â€œpartnersâ€ of its choosing, including one of the most corrupt and financially shaky companies in all of China.
Who Was Jack Ma?
One year ago, Ma was the richest man in China. He was the creator of Alibaba â€“ Chinaâ€™s largest tech company â€“ and The Ant Group, the largest Fintech company in the world. His corporate empire had reached private-sector superpower status, on a par with the Western FANG-giants. Alibaba alone was worth more than any U.S. company except for Apple, Amazon and Google.
Ma was also a worldwide celebrity â€“ the most famous living Chinese person. According to polls he was more well-known outside China than Xi Jinping. Jack Ma was Jeff Bezos, Elon Musk and Bill Gates all rolled into one. He was the front-man for the new China:
- â€œIt is hard to overstate the importance in China of Mr. Ma and his two companies. They have become synonymous to innovation. The media in China calls the countryâ€™s rising tech sector, â€˜The era of Ma.â€™â€
The abrupt reversal of his fortunes has been shocking to watch. Maâ€™s assets have been stripped, shorn, and degraded (â€œrectifiedâ€ is the English word often given as the translation for whatever verb in Chinese describes what Beijing is doing to his businesses).
The Canceled Ant IPO
The last-minute quashing of the Ant Groupâ€™s Initial Public Offering was the opening shot (which I wrote about at some length last year). The offering would have set a world record. (In fact, Alibabaâ€™s IPO in 2014 had been the largest ever at that time. Antâ€™s was to have surpassed it by 40%.)
The size of the deal itself doesnâ€™t portray the scale of the financial phenomenon. The Ant IPO had become â€“ by October 2020 â€“ a true frenzy. The share price on the private market ran up 50% ahead of the effective date, and the offering was said to have been 80 times oversubscribed. The Wall Street Journal called it â€œa $3 trillion scramble.â€
Ma was triumphant. It would be, he said,
- â€œthe biggest IPO in human history. Furthermore, for the first time ever, it is set in a city other than New York . . . A miracle is happening.â€
The WSJ reported that the order book exceeded â€œthe value of all the stocks listed on the exchanges of Germany.â€
Then â€” Beijing killed the deal.
Carving up the Company
Following the IPO fiasco, regulators began to disassemble Ant. Its consumer financing business was set to be restructured, with new â€œpartners.â€
- â€œThe central bank ordered Ant to form a separate financial holding company that would be subject to the kind of capital requirements applied to banks. That could open a door for big state banks or other types of government-controlled entities to buy into the firm.â€
The government also had its eye on one of Antâ€™s most valuable assets - its data, derived from billions of consumer transactions it processes. The tech-intensive analytics generated from this resource have been the basis of Antâ€™s competitive advantage over the less technologically sophisticated traditional banking sector in making consumer credit decisions. Beijing aimed to â€œrectifyâ€ that, too.
- â€œAnt will also be required to break an â€œinformation monopolyâ€ on the vast and detailed consumer data it has collected, the central bank said.â€
- â€œHiving off the treasure trove of data on more than 1 billion people is a key part of Antâ€™s business overhaul in response to a regulatory crackdown.â€
Neutering Antâ€™s Money Market Fund
Antâ€™s Groupâ€™s money market fund was perhaps its most amazing and explosive success story. In just four years, the fund became (briefly) the worldâ€™s largest, surpassing the American establishment giants like Fidelity and JP Morgan and â€œshocking banking executives around the world.â€ Ant built this fund up by inviting Chinese consumers to hold their spare cash (â€œleftover treasureâ€ in Chinese) in these accounts.
Beijing took note. Antâ€™s business was thrown into reverse, shrinking 18% in the first quarter of this year, and down almost 50% from its peak.
This decline is not (as has been suggested by some) due to â€œnaturalâ€ market forces, interest rate shifts, or trends in the Chinese equity markets. It is the direct result of Beijing in action.
- â€œAnt Groupâ€™s money market fund has shrunk to a more than four-year low as users shifted their cash in the face of Chinaâ€™s crackdown on Jack Maâ€™s payments groupâ€¦ Ant was ordered to â€œactively reduceâ€ [the fundâ€™s] size as part of a restructuring deal struck with Chinese authorities last week.â€
In April, a â€œrecordâ€ fine of $2.8 Bn was levied against Jack Maâ€™s flagship, Alibaba â€“ for antitrust violations. The dollar amount appeared far smaller than the financial damage from the broken Ant IPO, and some observers dismissed it. Still, it was the description of the â€œsinâ€ that mattered. The company was accused of â€œabusing its market dominanceâ€ and, again, â€œordered the company to â€˜rectifyâ€™ its behaviorâ€ and â€œshrink its business.â€
- â€œThe regulatorâ€™s punishment of Alibaba Group is a move to standardize the companyâ€™s development and set it on the right path, to purify the industry and to forcefully protect fair competition in the market.â€
(â€œStandardize,â€ â€œPurify,â€ â€œSet on the Right Pathâ€â€¦ The pronouncement rings with Orwellian cadences. And who would ever have thought to hear about â€œprotecting fair competitionâ€ from the communists?)
Chinese authorities have piled on other penalties, which seem minor, or tangential, but in context they display Beijingâ€™s animus even in petty matters.
For example, the companyâ€™s highly popular Internet browser â€“ number 2 in the Chinese market with over 400 million active users â€“ was deleted at Beijingâ€™s insistence from the app stores of most mobile and Internet companies in March.
In April, Beijing announced an investigation into the Antâ€™s dealings with the Shanghai stock exchange to obtain approval for the IPO. Insider dealing and quasi-corruption were implied:
- â€œThe probe examines how an array of state funds, including massive sovereign-wealth fund China Investment Corp. and the countryâ€™s largest state insurersâ€”among them China Life Insurance Co. â€” got to invest in Antâ€¦ Listing standards and procedures set by both the China Securities Regulatory Commission and stock regulators in Shanghai are under scrutiny. The way Antâ€™s IPO application was handled fueled Mr. Xiâ€™s concerns the stateâ€™s interests werenâ€™t being adequately protected.â€
Closing Maâ€™s Hupan University
Also in April, Ma was removed as president of Hupan University, the ultra-elite business school he founded and endowed in 2015.
This is to my mind the saddest of all these injuries. The plan for Hupan was ambitious, bold, innovative. It promised a fresh approach to business education, in some respects going beyond anything done elsewhere.
- â€œAfter a rigorous, six-month selection process, Jack Maâ€™s Hupan University announced the commencement of its new student class. More than 40 CEOs from Chinese tech unicorns were welcomed to the program, which promises to be one of the most powerful business networks in the country.However, the program is more famous for its powerful alumni that clearly influence Chinaâ€™s technology business sector. While only 207 Chinese corporate executives are among the schoolâ€™s alumni, they include many well-known names.â€¦ A qualified applicant must head a startup which earns a minimum of RMB 30 million (around $4.5 million) in revenue, has paid taxes for more than three years, and has at least 30 employees.â€
As an educator myself, I was impressed with this model. It fit with Chinaâ€™s desire to leapfrog the slower, more organic American approach to business education, and combined what we would call â€œadvanced Exec Edâ€ with an intensive shared personal experience and network cultivation. The closest thing to this in the U.S. is the Harvard Business School, and Ma wanted to go even further. It was a grand vision.
It was working:
- â€œHupan quickly became one of Chinaâ€™s most prestigious business schools.â€
- â€œWe want Hupan to run for 300 years.â€ - Jack Ma
Beijing will now apparently dismantle the whole thing. â€œThe Chinese Communist party has grown increasingly suspiciousâ€¦
- â€œJack Maâ€™s elite business academy has been forced to suspend new student enrollments following pressure from Beijing as authorities tighten their chokehold on the Chinese tech billionaireâ€™s empire.â€
- â€œMa needs to disassociate himself from the organisation but there are worries that Hupan may have trouble attracting students if Ma exits completely,â€ one person said. â€œThe academy is popular because of him, not its curriculum.â€
Now, the worst of it â€“
It was reported last week that â€œregulators approved Jack Maâ€™s Ant Group to start running a new finance company.â€ It will absorb the most profitable part of Ant â€” the consumer lending business. Ant will contribute its massive portfolio of $155 Bn in outstanding loans.
- â€œThe unit will become the centerpiece of Antâ€™s restructured lending business, which had grown so large that it issued about one-tenth of Chinaâ€™s non-mortgage consumer loans last year.â€
However, Ant will now own just 50% of the new company - to be called Chongqing Ant Consumer Finance. Ant even has to pay another $625 million for a half-stake in its own business! The other 50% is being handed out to several new â€œpartnersâ€ (who apparently are not required to make capital commitments). They include a battery company (?), a manufacturer of video surveillance equipment, and, yes, an actual bank, though it is a wholly owned subsidiary of one of the state-owned â€œbad banksâ€ set up in the 1990s to process massive amounts of non-performing loans that were choking the state banking sector at that time.
But the real shock is who gets the final seat at the boardroom table: Huarong Asset Management. They are being given 4.99% of the business, for nothing it seems.
Huarong is the most notorious bad actor in all of Chinese finance.
- The company was created as another one of the â€œbad banksâ€ in the 90s â€“ and so was swimming in polluted waters from the start, trafficking in bad loans
- It later expanded its business recklessly into many other areas outside its charter, including large, risky foreign private investments; it is even today not entirely clear to Chinese authorities what it owns
- Huarong developed a culture of massive and systematic corruption, led by its CEO Lai Xiaomin, until his downfall in 2018 â€” the company became a media â€œvillainâ€ in China, an example of fraud and incompetence, the subject of a lurid TV series and documentaries that aired on national networks
- This year, Huarong has flirted with bankruptcy, as its past sins catch up with it â€“ it is the largest Chinese issuer of dollar-denominated foreign debt â€“ $22 Bn â€“ and is said to be on the edge of default, which may provoke a regulatory crisis (because of its majority state ownership)
- Huarongâ€™s troubles threaten the integrity of the larger fixed income market in China, and could force a government bailout
Oh, and in January 2021, former CEO Lai Xiaomin was executed for bribery, â€œgreedâ€ and other sins.
Bringing Huarong into this venture shows that someone in Beijing has a nasty sense of humor. Itâ€™s as though the U.S. government had said to Facebook, â€œMr. Zuckerberg, say Hello to your new partner, Bernie Madoff.â€
Media reports portrayed this new deal as a â€œthawâ€ and an â€œeasing of tensionsâ€ â€” a â€œgreen lightâ€ for Jack Ma. But the addition of Huarong feels like mockery, or even contempt, on the part of Beijingâ€™s regulators for Mr. Ma and what he represents. To tie the most dynamic and innovative high-tech entrepreneur China has produced so far to a corrupt, bankrupt, sluggish, thuggish and incompetent wreck of a companyâ€¦ What can that signify, except contempt?
It is at the very least a message, and a warning, to the rest of the private sector. It is also another strategic blunder on Chinaâ€™s part â€“ but that is for a future column.
George Calhouns new book is Price & Value: A Guide to Equity Market Valuation Metrics (Springer 2020). Prof. Calhoun can be contacted at firstname.lastname@example.org or Twitter @GeoCalhoun520
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