Squashing Ants: Why Chinese Regulators Were Right to Halt the Ant Financial IPO

Many investors have been asking me about the Chinese government’s intervention last year in the Ant Financial IPO. Most of these investors already have a pre-existing story: that the scuttled IPO is an example of the communist party punishing business success and targeting those who, like Jack Ma, openly critique regulators. Investors want to know if I agree with this media-driven narrative.

I do not – or at least not completely.[1]

Although an anti-capitalist narrative is an easy and useful story to sell newspapers, superficial narratives almost never capture the entirety of what is really happening inside China. Any meaningful analysis of a Chinese regulatory action should start with a baseline understanding of and experience working with Chinese regulators. That said, it has proven a difficult task to help investors look beneath the surface to gain a more accurate, complete, and nuanced understanding of Chinese economic policies and regulations.

So, let me start with just a simple observation, which is based on my 12-years’ experience running an investment management business in China: I have generally found Chinese regulators to be well-meaning, intelligent, and possessing long and deep industry experience in markets around the world. Philosophically, there are differences between the U.S. and Chinese regulatory approaches. However, these differences are driven primarily by the nature of their markets, not by political sentiment. Specifically, Chinese regulators prefer active intervention due to the relative immaturity of their financial market and the retail dominated nature of their stock market.

Unfortunately, when I share this balanced perspective and use it to analyze Chinese regulatory actions, I am often labelled a biased China “bull”. This is why I couldn’t help feeling validated when I saw the great Charlie Munger share a similar observation about the delayed Ant Financial IPO. As reported by Reuters:

The 97-year-old told CNBC that the United States should take a leaf out of China’s book and “step in pre-emptively to stop speculation . . . I don’t want all of the Chinese system, but I certainly would like to have the financial part of it in my own country”.[2]

Those who know me well know it’s uncomfortable for me to say, “I told you so.” Still, validation from someone with Munger’s stature feels good. I’ve been making the same point for many years. Although China’s regulatory system is different than the U.S.– and there are sensible reasons for those differences – it is a robust system that is principally designed to protect consumers and investors. Which takes me back to the question that began this article.

What really happened with the Ant Financial IPO?

Six months ago, when Chinese regulators halted the Ant Financial IPO, the western media cried foul. Reporters seemed incapable of viewing the regulatory action through anything other than a political lens. Depending on the publication, the regulatory action was attributed to a power struggle, personal politics, bureaucratic infighting, cronyism, naivety, and incompetence. NYT characterized the halted IPO as simply a clear message from the CCP: "No private business gets to swagger unless the government is on board with it".

As a researcher, I’m more interested in data than I am politics. And when viewed through a regulatory and policy lens, this is what I concluded: the government’s intervention in the Ant Financial IPO was quite reasonable. While the execution and optics may have been clumsy – a lesson Chinese regulators will no doubt take to heart – the government had legitimate concerns regarding Ant Financial’s practices, levels of oversight, and impact on the broader financial market. Put simply, the government was unwilling to put the interests of the investment banks, P.E. funds and company insiders – all of whom expected a massive payday from the hottest and most over-subscribed IPO of the century – ahead of the interests of individual consumers who would purchase Ant Financial’s products and retail investors who would buy Ant Financial’s IPO hype without understanding its regulatory deficiency.

Some media have criticized the Chinese regulatory action by noting that Ant Financial was an innovator in the financial space – and that is certainly true. Much less reported is that Ant Financial’s innovation involved circumventing the normal regulatory approvals associated with a bank – approvals that are meant to ensure the bank can meet its obligations. While innovation is laudable in China, that innovation cannot come at the expense of individual consumers or the financial market as a whole. While this approach is, of course, radically different from that of U.S. regulators, it was a rational action in light of Chinese regulators’ priorities and approach.

Today, as I reflect on the Ant Financial IPO with the benefit of hindsight, I can’t help but share Munger’s sentiment: perhaps there are elements of the Chinese regulatory approach to which we should aspire in our own country.

[1] To be clear, politics are a powerful force in China and they certainly had a role in how the Ant Financial IPO story played out – just not in the way so often presented by the media. Given the unprecedented scale of the Ant Financial IPO and Mr. Ma’s open criticisms of financial regulators, Chinese regulatory officials would naturally feel compelled to run any proposed action “up the flagpole” – in this case, all the way to President Xi himself. This is not so different than in the U.S., where frontline bureaucrats may not feel empowered to take principled positions against powerful business interests without knowing they have “cover” from senior managers or officials. If the Ant Financial IPO had been less sensationalized and if Mr. Ma had been more discrete, the matter might have been resolved with less disruption. Regardless, it is a mark in favor of China’s regulatory regime that senior officials stood behind a principled regulatory decision even knowing full-well the media and industry backlash that would follow. It is not clear that officials and politicians in other countries would similarly stand behind a regulatory decision in light of potential fallout.

[2] UPDATE 1-Berkshire's Munger says China right to clip Ma's wings | Reuters