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Credit Cards, Ant Financial, and Jack Ma: Sour Grapes or e-Yuan?

Brian Riley by Brian Riley
December 3, 2020
in Analysts Coverage, Commercial Finance, Credit
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Credit Cards, Ant Financial, and Jack Ma: Sour Grapes or e-Yuan?

Credit Cards, Ant Financial, and Jack Ma: Sour Grapes or e-Yuan?

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Anyone can feel empathic about a bride left at the altar, so imagine how Jack Ma feels after Chinese regulators pulled back on the Ant Financial IPO within hours of the launch. Some may say that Jack does not need codling because he is one of the world’s most prosperous. On the other hand, he earned every dime, and that is what free-enterprise is all about.

Here is a  good read from the Foreign Policy Research Institute that breaks down some complicated issues.

  • The 11th-hour suspension of Ant Group’s initial public offering (IPO) in early November has been portrayed as an example of the Chinese government’s determination to enforce its supremacy.
  • But Ant’s case was particularly fraught. Its IPO was vaunted as the biggest ever, poised to raise $32 billion.
  • Ant’s digital payments service has become deeply important to the Chinese economy.
  • Its business model clashes with two key Beijing priorities: concern over the country’s ballooning private debt, and more importantly, its plan to launch a digital currency—the e-yuan, as it has come to be called—that can help internationalize the renminbi and establish it as a premier reserve currency, and perhaps even rival the dollar as the world’s chief currency.

First, the whole issue of a reserve currency is important. Since WWII, the U.S. dollar has been the world’s reserve currency when, according to Investopedia, “delegates from 44 Allied countries met in Bretton Wood, New Hampshire, to come up with a system to manage foreign exchange that would not put any country at a disadvantage.

It was decided that the world’s currencies couldn’t be linked to gold, but they could be linked to the U.S. dollar, which was linked to gold.” For a deeper dive, see the U.S. Department of Treasury’s comments on a reserve currency.

The FPRI supposes that the issue might be Jack.

  • In late October, Ma uncharacteristically lashed out in a speech, saying capital requirements were outdated and that China lacked a true “financial ecosystem.” He likened Chinese banks to “pawn shops” for requiring loan collateral and implied that they underserved smaller, younger borrowers. The comments clearly didn’t help Ant’s case, nor should they have been expected to. Financial stability is at the core of the Communist Party’s legitimacy.
  • Ant’s business model raised red flags in Beijing for two reasons. First, Ant’s profits have been increasingly tied to consumer debt that is both rising and loosely regulated given Ant’s status as a fintech company, not a bank. Ant has aggressively expanded into offering loans, credit, investments, and insurance to hundreds of millions of consumers and small businesses. This has spurred concerns over high debt levels. It has also prompted jealousy in a wider banking system geared more toward supporting state policy and large corporations.

So, bring in the regulators.

  • Just days before the IPO and a week after Ma’s controversial speech, China imposed new minimum capital requirements and other restrictions to guard against “systemic risk.” (China’s private debt rates are among the world’s highest, at over 200% of gross domestic product.) The move plugged some of the regulatory gaps that Ant Group had stepped through. Analysts believe the regulations will “put a significant dent” in Ant’s future revenues.
  • The second red flag pertains to Ant’s widely used Alipay digital payments platform, which enables cashless transactions using smartphones, QR codes, and digital wallets. Alipay piques Beijing’s discomfort with alternative pillars of power, and clashes with its urgent ambition to launch the e-yuan. In addition to supporting China’s ambition to establish the yuan as a global currency, the central bank sees the e-yuan as a means of diminishing Alipay’s dominance in the Chinese economy.

And the yuan…

  • In contrast, as a digital equivalent of cash, the e-yuan is designed for interoperability. A consumer could use the currency to make payments anywhere, and merchants could avoid paying transaction fees. In Alipay’s prospectus, both the e-yuan and payment-network interoperability are mentioned as factors that could adversely impact performance. Of course, the many small investors who sought Ant Group shares could not be expected to connect these dots.

We will have to see how this materializes. Ant Financial has moved well beyond the Chinese borders. For instance, it is moving deeply into LAC.

But as for Jack Ma, I think he has the inspiration of Dee Hock, one of Visa’s original visionaries.

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

Tags: Ant FinancialChinaCredit CardsDebtjack ma
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