Sunday, November 08, 2020

Why China Stepped On The Ant Group (Part 1): To Stop A Bubble

George Calhoun Contributor
Markets


(FILES) This file photo taken on October 13, 2020 shows the Ant Group headquarters in Hangzhou, in ... [+] AFP VIA GETTY IMAGES

The most shocking, financial-market-impacting event this week was… No, not the electoral chaos in the United States (widely expected, priced in, a little turbulence smoothly ridden out).

It was the news that the Chinese government decided they had to step on an ant… specifically, on Ant – that is, the Ant Group (formerly known as Ant Financial Services). Days before Ant’s huge scheduled public offering in Shanghai and Hong Kong, Chinese regulators (acting probably at the direction of Xi Jinping himself) summoned the company’s founder Jack Ma (China’s richest man, by the way) to Beijing for a bit of re-education.

As the Chinese press put it, “regulatory interviews” were conducted.


“The regulators provided no further details, but the Chinese word used to describe the interview — yuetan — generally indicates a dressing down by authorities.

Ant said, “Views regarding the health and stability of the financial sector were exchanged.”

It may have involved rather more than an exchange of views. The next day, the government summarily canceled Ant’s $37 Bn offering – which would have been the largest IPO of all time – and a long-anticipated milestone in China’s rise towards global parity in technology and finance. What happened?

The full story here has three chapters:

1. The market dynamics surrounding the offering itself

2. The dangerous business model that created the risk of a financial cataclysm, both for the company and for the entire Chinese financial system

3. The inevitable impact on Ant’s valuation (had the offering gone forward) – which would have driven a likely collapse of the shares following the IPO

This column focuses on the first of these factors: the IPO Fiasco, and the immediate concerns that led to its abrupt cancellation.

Who/What is Ant?

It is likely that many Americans still have not heard of Ant, nor would recognize its logo. That will change soon.
ANT LOGO

Ant is a high-tech Chinese financial supermarket launched just 6 years ago. It has probably grown bigger, faster, than any company in history. It is adorned with superlatives:


the world’s most highly valued Financial Technology company
the world’s largest money market fund
the world’s largest mobile and online financial payments company
More payment transactions processed than Mastercard & Visa



Ant, Visa, Mastercard, Annual Payment Transactions CHART BY AUTHOR

More valuable than any bank in the world (or would have been…)



Ant vs the Big American Banks – Market Value CHART BY AUTHOR

Ant has been called “a powerful symbol of the potential of China’s financial markets.” Just last month The Economist wrote: 

“More important than its size is what Ant represents. It matters globally in a way that no other Chinese financial institution does.”

As for Jack Ma, he is a celebrity entrepreneur in China comparable to Elon Musk or Bill Gates or Warren Buffett, or all three together. Considering China’s aspirations to achieve technological parity with the West, Ma is a national front-man – on a par even with Xi Jinping himself:

“It 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 country’s rising tech sector, ‘The era of Ma.’”

The Offering Fiasco
With all this as context – Ant’s IPO was much more than a stock offering. It was to be a statement, and a symbol, of China’s rise, “the crowning glory of a homegrown financial technology” – and at the same time, a geopolitical rebuke to American politicians and regulators who have been threatening to close U.S. stock exchanges to some Chinese companies (covered in a previous column). It was a Declaration of Independence of sorts:

“Its listing in Shanghai was intended to show that China no longer needs US capital markets to finance its world-class corporations.”

Ant was said to represent the future of banking, insurance, investment – the future of consumer finance in all its aspects, from mutual funds and money market accounts to digital currency and credit scoring – indeed, so futuristic was its business model that the idea of a mere bank seemed suddenly obsolescent and at risk. Even Western giants like Citibank and JP Morgan suddenly looked like dinosaurs, vulnerable to the new species of companies like Ant, armed with Fintech. Ant was poised to surpass them all in market value. The aura of success was palpable. Investors were already giddy. Ant shares rose 50% in the grey market in the run-up to the offering itself.

But the Ant phenomenon loomed much larger than these numbers show. The IPO itself was shaping up as a catalyst for a much larger financial earthquake. The offering was oversubscribed 870 times – $2.8 trillion of orders just from retail investors in mainland China. There would almost certainly have been an enormous “pop” in the share price following the offering. Even the sober-and-superior Wall Street Journal goggled at the size of the Ant IPO order book: “It exceeds the value of all the stocks listed on the exchanges of Germany.”

That was the state of affairs as of Friday Oct 30.

On the following Tuesday, “the most lucrative coming out party in history” was abruptly postponed, perhaps canceled. Retail investors were “shell-shocked.” Dozens of “elite” foreign investors who got in earlier were expecting an $8 Bn pay-off – which didn’t happen. The investment bankers (the usual suspects, including Goldman, JP Morgan, Morgan Stanley) were out $400 million in fees.

The event became yet another Ant superlative – the biggest IPO by far ever to be withdrawn.
Why?

Of course the frenzy over the possible offering was mirrored in a new frenzy of theories about what-just-happened. 

Punishment?

A common explanation was that the Chinese government had simply decided to discipline Ant, “to cut Jack Ma down to size.” Ant “was becoming a monster.” Ma was “arrogant.” His stinging public criticism aimed at China’s regulators triggered Beijing’s wrath. Indeed, speaking at a Shanghai conference a week earlier, Ma was extraordinarily blunt. He spoke of the Chinese financial establishment as a “club for the elderly.” He accused the big Chinese banks of having a “pawnshop mentality” – out-of-date and non-tech-savvy. (He had said on another occasion that he would like to make them “feel unwell.”) His broad view of the regulatory framework was scathing:

“We cannot regulate the future with yesterday’s means,” the 56-year-old Ant co-founder said at the forum. “There’s no systemic financial risks in China because there’s no financial system in China. The risks are a lack of systems.”

This could not have gone down well with the incumbents and the bureaucrats.

But does this explanation really make sense?

There is a high cost for abrupt and heavy-handed intervention in ostensibly free markets.

“Predictable regulation helps to underpin confidence in markets and the economy. Unexpected changes, especially if politically-driven, are usually damaging.” [The Financial Times]

China is trying to establish a world-class financial system. Moves that evoke memories of a Mandarin past – hostile, peremptory and perhaps predatory – would seem to undermine this effort.

“The turn of events is not just painful for Ant. It reflects poorly on China’s regulators. The last-minute halt of Ant’s listing highlights the opacity of the Chinese political system and the risks that can trip up even its most successful companies.” [The Economist]
“The ripple effects of the cancelled IPO are many — and mostly worrying. ‘The message is that no big private businessman will be tolerated on the mainland.’” [said a Hong Kong University professor]

Why would China risk impairing its strategic program for the sake of disciplining an outspoken businessman (who also happens to have built the most successful business that the country has ever produced)?

But the fact that this theory doesn’t make sense (to an outsider) doesn’t mean it isn’t true. Beijing has committed a string of such blunders recently. (Consider the Hong Kong takeover, or Beijing’s hostage diplomacy related to Huawei.) Old habits of authoritarian offense-taking persist, one supposes.

The Enmity of Vested Interests

Another theory is that the big established Chinese banks — the very “pawnbrokers” Ma denounced – want to clip his wings for business reasons, and force Ant to play by their rules, and live with the same constraints. Ant is competing aggressively, and successfully, taking business from powerful incumbents, who have lobbied hard to rein him in. In fact, in the market’s view – which is always future-oriented – Ma and Ant had already won. “Jack Ma Inc.” – which includes both the Alibaba Group BABA +4.2% (the Chinese version of Amazon AMZN -0.3%, to use a very short-hand description) and the Ant Group – has far surpassed the value of the traditional Chinese banking giants.


Jack Ma Inc. vs the Establishment CHART BY AUTHOR

This explanation makes some sense too — and some nonsense. At the very least, the regulatory response seems too violent. The normal way to rein in a company like Ant, slowly and without shocking the markets, is to impose gradual new regulations (e.g., higher capital reserves, or line-of-business restrictions) or new taxes. With plenty of discussion, and time for all parties to adjust. The Financial Times points this out:

“The draft regulations, by themselves, do not explain why the IPO was suspended. In normal cases, Beijing’s regulators consult with key industry players and, when a consensus is reached, announce the new rules. That way the market impact is minimised.”

The suddenness, and the forcefulness, of this move is not the typical behavior of a bureaucratic estate, even an unfriendly one. Unless…

Panic Over A Mega-Bubble

I think there is an element of panic in this move, as though the regulators suddenly realized that a serious crisis might be imminent. The awareness of the need for swift, even violent action was brought about (I think) by the extraordinary frenzy of anticipation surrounding the offering, the trillions of dollars of buy-side interest from small investors, which meant that
a valuation bubble in Ant’s shares was about to inflate – with 870 times greater demand for the Ant shares than supply, this was very likely  the millions of investors who wanted in on this deal were loading up with debt to purchase their shares – up to 95% leverage – exposing them to great losses when…  those small investors would be the ones who bought into the backend of the upwards price spiral, paying the highest prices with borrowed money
the flaws in the company’s business model became clear to the market, driving a severe downward re-valuation – triggering massive margin calls and huge losses

This scenario is not imaginary. This summer, the Shanghai STAR Market IPO for China’s leading chip maker (SMIC) was also oversubscribed. The company nearly tripled in value on the first day of trading – only to fall back as its business realities began to sink in. The losers were largely retail investors who bought into the excitement of the new listing. 


SMIC Rise and Fall CHART BY AUTHOR


This pattern is common in China today.

“Orders for some share sales have been thousands of times the stock on offer, and some stocks have surged as much as 10-fold on their first day. In another sign of exuberance, some Shanghai prices are far removed from those of the same shares listed elsewhere. [At the height of the frenzy] SMIC’s Shanghai stock price was roughly three times its Hong Kong stock price.”

I think that the Chinese authorities suddenly realized that this same scenario was likely to develop out of the Ant offering. Market dislocations, excessive leverage, extreme price spikes, big losses for small investors. The Ant IPO was to have been 6 times the size of SMIC’s IPO. But that was just the tip of the iceberg – remember that the nearly $3 trillion of retail demand was stacked up behind the opening, ready to explode into the stock, and blow prices upwards. Remember that this was more than “the value of all the stocks listed on the exchanges of Germany.” In fact, the investor demand for Ant shares was 7 times greater than the total value of the companies traded on the Nasdaq-like Star exchange in Shanghai. 



Comparison of Ant Investor Demand with the Market Cap of the entire STAR Market and the Shanghai ... [+] CHART BY AUTHOR

The prospect of much broader market instability loomed. This is what suddenly panicked the bosses in Beijing.

As to what it was about Ant’s business that triggered their concern... that is the subject of the next installment.


George Calhoun's new book is Price & Value: A Guide to Equity Market Valuation Metrics (Springer 2020). Prof. Calhoun can be contacted at gcalhoun@stevens.edu

Founder & Director of the Quantitative Finance Program and Hanlon Financial Systems Center at the Stevens Institute of Technology (New Jersey) and Advisory Board Member at Hanlon Investment Management



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The Trump legal team’s failed Four Seasons press conference, explained

NOT THAT FOUR SEASONS 
THE OTHER ONE BY THE PORN STORE

The bizarre venue overshadowed Rudy Giuliani’s conspiracy-theory-laden election rant, providing a poetic stage for the end of Trump’s presidency.

By Katelyn Burns Nov 8, 2020
Rudy Giuliani, President Trump’s personal lawyer, speaks during a press conference held in the parking lot of a landscaping company on November 7 in Philadelphia.
 Chris McGrath/Getty Images


President Donald Trump’s legal team gathered Saturday morning in Philadelphia to hold a press conference, at which they shared conspiracy theories about why Trump lost the 2020 election. The fact that the president’s lawyers are working to find ways to overturn the election results is notable, but perhaps even more so is where they chose to hold their conference: Four Seasons Total Landscaping.

The small business, which bills itself as a 27-year-old, woman-owned company that has grown to service major clients (including the city’s airport) appears to be an American success story. But the decision to hold the conference there, in front of a white garage door papered over with campaign signs, was incredibly odd. It felt awkward and small, the antithesis of a president and campaign that has long valued over-the-top visuals and maximum entertainment value.

The announcement of the event made it seem as though it would be a typical Trump team affair full of glitz: “Lawyers News Conference Four Seasons, Philadelphia. 11:00 a.m.,” Trump tweeted Saturday morning.

He later clarified, however, that it wouldn’t actually be held at the hotel chain but at the now-famous landscaping business, something the Four Seasons Hotel Philadelphia confirmed on Twitter






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The internet exploded with mockery and memes at the clarification, assuming there














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The internet exploded with mockery and memes at the clarification, assuming there had been some bone-headed mix-up by the Trump campaign The New York Times reported, however, that the mistake was “not in the booking, but in a garbled game of telephone.” The president was apparently told the conference would be at the business but misunderstood the name of the venue, thinking it would be held at the upscale hotel.

In many ways, this mix-up is indicative of the Trump presidency and the help he has received from his team of lawyers, led by former New York City Mayor Rudy Giuliani, who headed the conference

Throughout his presidency, Trump has made grand proclamations of things to come — be it a state-spanning border wall paid for by other countries or a health care plan he’s insisted will protect preexisting conditions.

But when those things arrive — if they do — they’re far less impressive than promised. Only 15 miles of new border wall have been built, for instance, while the health care plan Trump repeatedly promised would be coming “within two weeks” never materialized.

Giuliani, too, has had this tendency; he spent months leading up to special counsel Robert Mueller’s report on potential collusion between Trump’s 2016 campaign and Russia touting an explosive counter-report that never arrived. His publicity-drawing quest to find dirt on President-elect Joe Biden turned up nothing, and his recent attempts to play up salacious material found on a laptop that he alleged once belonged to Biden’s son, Hunter Biden, have been confusing and strange — and have gone nowhere.

Instead of giving the administration positive accomplishments, these grand promises by Trump and his allies have underscored their ineptitude while distracting from important issues. That’s what happened Saturday: The bizarre venue choice overshadowed the point of the press conference, which was meant to spotlight Giuliani’s rehash of disproven conspiracy theories about massive voter fraud.

The lies the press conference was supposed to be about, briefly explained

Just before noon on Saturday, reporters gathered in an industrial park in north Philadelphia for a press conference featuring Giuliani, Trump legal adviser and former Florida Attorney General Pam Bondi, and Trump campaign adviser Corey Lewandowski.

The team had called the press conference to share baseless accusations of electoral malfeasance. Giuliani made several untrue statements about nonexistent voting irregularities in Pennsylvania, falsely complaining that poll watchers had not been allowed at counting locations in the state, a claim that has been negated by courts and publicly available video evidence.

These claims, while lies, echoed Trump’s rhetoric about the election. The president spent much of Saturday golfing and tweeting falsehoods about vote-counting problems; later he said he had no plans to concede.

But Giuliani’s words ultimately got little attention: As Trump’s attorney began speaking, reporters suddenly started packing up their equipment to leave.

Several major media outlets had just called the election for Biden.

It was a poignant moment of clarity and, it seemed, a symbolic repudiation of Giuliani’s wild and baseless conspiracy theories. He continued his remarks, though not many people were paying attention: There was a new president-elect, one who rejects the style promoted by the president and his lawyer.

The campaign, which has held a number of similar press conferences in Philadelphia attempting to cast doubt on the state’s vote count, has struggled to find appropriate venues for these events. Earlier in the week, Bondi and Lewandowski attempted to hold a press conference in the city following a court decision that allowed poll watchers to stand just 6 feet from workers counting ballots, rather than 20 feet. They tried to spin the ruling as a win; however, a DJ nearby blasted Beyoncé music and completely drowned out their remarks.

The space outside the Philadelphia Convention Center, where votes were being tabulated, was filled all week with Biden supporters chanting “count every vote.” It made for a difficult setting for the various Trump press conferences baselessly alleging voter fraud.

So a new, more remote, location was looked for and apparently found at Four Seasons. “All great Americans in PA use Four Seasons Total Landscaping,” Lewandowski tweeted later Saturday. “They love this country and are American Patriots. Thank you!!”

But even there, far from downtown, reality intruded and overshadowed the Trump team’s message. However, the venue choice appeared to benefit the company itself, which quickly went from an obscure landscaper to a place of national interest — and worked to capitalize on its newfound notoriety Sunday:

The Trump era may have roared in like a lion, but it’s quietly fading out

The whole debacle, from the downscale venue to the reporters packing up to the president’s attorney ranting with no connection to reality, provided a stark visual for the end of election week and a desperate end to America’s Trump era.

The president and the right-wing media apparatus in the US spent the last four years constructing an alternate reality wherein the most powerful man in the world and the lawmakers who surrounded him — who at one time had complete control over the government — were perpetual victims of conspiracies and vendettas.

They tangled the country up in these claims, leading to protracted battles over the Mueller report as well as the president’s impeachment. All of the claims seemed to suggest Trump was justified in his attempts to bend norms, break laws, and grab more power.

The president long indicated he would dispute a loss in a close election, but this one isn’t all that close. Liberals and progressives had feared Trump’s gambit might work, similar to how he escaped impeachment and wasn’t held to account for multiple abuses of power over the last four years. But ultimately, not even Trump can spin electoral math.

The idea that multiple states, some of which are controlled by Republicans, conspired to illegally rob Trump of an election win is ridiculous. And the Four Seasons press conference was a real emperor-has-no-clothes moment: A presidency that began with Trump’s descent into a golden lobby ended in a landscaping company’s parking lot, with the press packing up and leaving instead of staying and listening to nonsense.



Corey R. Lewandowski
@CLewandowski_
All great Americans in PA use Four Seasons Total Landscaping. They love this country and are American Patriots. Thank you!!
7:01 PM · Nov 7, 2020
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13.6K people are Tweeting about this

Ryan J. Reilly
@ryanjreilly
Four Seasons Total Landscaping wants in on this merch bonanza.
Image
9:15 AM · Nov 8, 2020
13.2K
2.1K people are Tweeting about this
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