China Takes Step Against Securitization, Consumer Borrowing With Suspension of Ant IPO

The still-playing drama of the US presidential election took pride of place over a blockbuster development in China: the eleventh-hour halting of what was to have been the biggest IPO evah, the dual listing of Ant Group for over $34 billion.

Even though China’s financial system is not terribly transparent, and English language reporting on China’s politics should be taken with a fistful of salt, regulators stomped on a globally high-profile company widely deemed to be one of China’s stars to send a message. And even from the other side of the world, mediated through the Anglo press, the message seems very clear: China is going to leash and collar businesses, whether banks or fintech players, that profit by giving consumers high interest rate loans and rely on securitization to shift the risk of loss on to other parties.

By way of background, Ant was originally Alipay, part of Jack Ma’s Alibaba, and was spun out in 2014. It has become the largest payment processor in the world. However, Ant’s expansion into higher-profit lending is what has aroused official ire.

The idea that regulators woke up a few days before the Ant IPO and blindsided the company with unexpected rules isn’t remotely credible. Yet the press is parroting Ant’s and disappointed brokers’ spin. The reality is that regulators signaled their requirements months ago (the Chinese appear to be less explicit in their public remarks than Western regulators typically are) and without a doubt informed Ant and any similarly-situated concerns of their requirements. Ma apparently thought he could defy the Chinese government. He’s learned otherwise.

The Financial Times comment section confirmed this take and lambasted the pink paper’s account, which mentioned but didn’t tease out the significance of Ma criticizing the government for being leery of unsecured personal lending:

At the end of October, Mr Ma criticised China’s state-owned banks at a financial summit in Shanghai. He suggested the big lenders had a “pawnshop mentality” and that Ant was playing an important role in extending credit to innovative but collateral-poor companies and individuals.

From the Financial Times’ peanut gallery:

Hater of Simpletons

For those who didn’t know what happened : check the new regulation which limits Ant’s leverage and enhances consumer protection, which also limits Ant’s valuation as a “tech” company. That was the main reason Jack fired at regulators in his speech [at the end of October] – and to be honest, there was no way he didn’t know the regulation long before the listing date and the speech (gov spent months on a policy, if not longer and would consult industry leaders)! If the IPO were not halted, investors would have suffered from major losses, not to mention the high leverage (60x+) and ABS put Ant’s customers at risk. Jack fired the speech to evade regulation and made sure HE made enough money from the listing. Not investors, not Ant users. Being sarcastic is easy. Try to get clear of what REALLY happened.

Now to the substance of the dispute, which led to the halt of the IPO and will require Ant to substantially restructure its business. Ant originates personal and small business loans to parties with little in the way of assets. These loans command higher interest rates than more conventional loans and from what we infer, “higher’ can mean “pretty high”.

As we have written, China hasn’t been shy about using leverage to boost growth, even though as we and others have written, over time, the incremental lending has produced less and less in the way of GDP lift. China has also had multiple mini-financial crises involving its “wealth management products.” These are typically uninsured investments that provide a fixed interest rate for a set period of time, typically five years. They have often provided funding for state-level real estate investments. Nevertheless, even if you allow for Michael Hudson’s view that land should be taxed aggressively to limit real estate rentierism, economists have found that borrowing to make productive investments in businesses, equipment, and buildings adds to growth, while increases in personal borrowing are a brake.

Another reason for China to take a dim view of personal borrowing is that the government prioritizes wage growth and improving living standards as its basis for legitimacy. There’s no reason, as in the US, to use consumer borrowing to mask stagnant worker wages. And the Chinese may even have recognized that overly financialized economies have lower rates of growth than ones at a more modest level of financial “deepening”. The IMF found that Poland was at the optimum level, but argued that more finance might not create a drag if the sector was well-regulated.

Mind you, we aren’t saying that China is a paragon of regulatory virtue. They still allow for stunning amounts of margin lending against stocks. And they’ve also sat pat as ghost cities, too often shoddily built, continue to rise, a textbook case of trading sardines.1 But they appear to want to avoid having a finance-driven economy, and also appear to have learned from some of our mistakes.

Now to the specifics of why Chinese officials came down on Ant. First, from the Wall Street Journal:

Some of the writing was on the wall earlier. While Ant was gearing up to launch its IPO, regulators had begun taking aim at the company’s fast-growing microloan business, which provides short-term credit to hundreds of millions of individuals and scores of small businesses.

On Sept. 14, China’s banking and insurance regulator issued a private notice to some commercial banks warning them about the risks of making loans in partnership with third-party institutions, according to a copy of the notice seen by The Wall Street Journal. It said banks should not be outsourcing their loan underwriting and risk controls.

When Ant partners with banks to make loans, the lenders provide the funding and bear the risk of defaults, while Ant collects fees for facilitating the transactions.

Two days later, the regulator published a guideline that placed caps on the volume of asset-backed securities that could be issued by microlenders. Two subsidiaries of Ant have bundled many loans into securities and sold them to raise funds for lending operations.

In other words, Chinese officials tried halting Ant’s practice of originating risky individual/small business loans and selling them to banks, both on the bank and Ant ends of the pipeline. That apparently didn’t lead to a change of course at Ant or its allied banks or lead to any change in appetite for its IPO.

Ant restricted how many could attend its roadshow presentations and required them to submit questions in advance. It also directed brokerage firms to assign coverage to tech analysts rather than financial services experts.

Back to the Journal:

On Monday, Mr. Ma, who is Ant’s controlling shareholder, Executive Chairman Eric Jing and Chief Executive Simon Hu were summoned to a rare joint meeting with four Chinese regulators. Ant said that evening that the group discussed the “health and stability of the financial sector.”

On the same day, China’s banking regulator released draft regulations that will likely force Ant to come up with $30 for every $100 in consumer and business loans it originates in conjunction with banks. That would require the company to use significantly more capital to support its lending unit.

“The government’s goal is to remind the company who is in charge of the financial system, not to put it out of business,” said Andrew Batson, director of China research in Gavekal Research.

The suspension of the IPO is proving to be messy, since many investors used margin loans to fund their allocation. Initially, investors were to take the hit for the interest charges; now it appears at least some brokerage firms will eat them.

Additional detail from the Financial Times:

A commentary posted on the websites of prominent Chinese state media outlets including People’s Daily late on Tuesday said the suspension of Ant’s listing would “safeguard the rights and interests of financial consumers” and investors. “The top priority of the Ant Group is to earnestly rectify and reform according to the requirements by regulatory authorities,” it added.

Guo Wuping, an official at the banking regulator, advocated greater regulation of Ant and other financial technology companies in an opinion piece for state media on Monday, noting their consumer lending products charged higher fees than credit cards issued by banks.

Mr Guo said fintech companies often lured young people into overspending so that “some people in low income groups and young people fall deep into debt traps”.

Some Financial Times readers saw this as a power play by Ma that backfired:


I think the main reasons are: Firstly, Ant as a company attempts to take part in setting rules. Secondly, the criticism about mortgage loan in Ma’s talk is basically challenging the dominant position of the real economy in China. Both of these are touching CCP’s bottom line, so they kicked Ant out of the game… Also Ma’s attitude in Shanghai definitely angered some people, who will allow their dog to start bargaining with them

It’s refreshing to see a government that isn’t afraid to slap down a rich businessman, even a high profile billionaire, who thinks he can call the shots. Sadly, the importance of political donations means that sort of thing is distant history in the US.


1 Our explanation from ECONNED:

Consider this classic Wall Street joke. On a slow day, some market-makers decide to start trading a can of sardines. Trader A starts the bidding at $1, B quickly bids $2, and several transactions later, E is the proud owner of the tin for $5.

E opens his new purchase and discovers the sardines have gone bad. He goes back to A and says, “You were selling rotten sardines!”

A smiles broadly and says, “Son, those aren’t eating sardines. They are trading sardines.”

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  1. vlade

    Hmm. I wonder how much this is about Ma vs. securitisation.

    I give you Home Credit, owned by the richest Czech, Peter Kellner. While Ma’s richer than Kellner, it’s like 3 times, not an order of magnitude.

    Home Credit is the only foreign company able to sell consumer loans in China (on scale). I believe that their most recent loan book in china is close to 20bln USD. I _know_ that all of those are securitised (and, if they are on similar terms as HC has elsewhere, they are pretty predatory). And he’s a foreigner, although with, apparently, excellen connections. China loan market is only one example *), he also won court cases in Russia against Putin’s oligarch friend, who tried to grab some of his businesses there, that everyone excepted him to lose.

    Arguably, this is just a couple of percent of the whole Chinese loan market, so the point with Ma could be more that it’s way too large a slice of market he has, as opposed to securitisation per se.

    I don’t know.

    *) Kellner’s PPF (his holding) funds a pro-China think tank in the Central Europe, and very visibly stepped up supporting pro-China organisations and rhethoric about a year ago. That was when there was a spate between China and the CZ around visit of the Czech Senate’s head to Taiwan. The word is that China used its regulatory levers (suddenly stopping PPF from taking some fees it was taking for years, that were a good part of its income in China) to get PPF action as its lever in the CZ.

  2. The Rev Kev

    I read that Ma has had problems with Beijing for some time about him wanting them to loosen up restrictions because, like Jeff Bezos, apparently he does not have enough money yet. Ma’s approach was to use Big Data & AI to credit scores so that loan delinquencies could be kept at about only 1-2% to which Beijing replied ‘Pull the other one – it plays jingle bells.’ Most of Ant’s portfolio consists of new loans so nobody really knows how they were going to perform. After the internal destruction of so many western countries through financialization, Beijing probably decided that now was not the time to let China’s billionaires take over the running of the Chinese economy and so they put their heavy boot down. Ma should have known better.

    1. Thuto

      The problem with elites from “authoritarian” countries is that hobnobbing with their western counterparts gives them a false sense confidence re: their ability to boss around their governments (as western oligarchs do). This miscalculation of their level of influence sets them on a collision course with regulators, and skirmishes of this nature mostly end up one way, with a thumping loss for the oligarch. This has the effect of recalibrating confidence about the oligarch’s ability to capture the state and turn it into a personal water carrier to more realistic levels, in addition to this type of thing being a shot across the bow to deter displays of petulant chest-thumping by other members of the billionaire class.

      With all the trouble brought on by the trade wars, China has to accelerate its transition to an economy driven mainly by internal consumption. Having consumer spending stifled by high interest payments to Ant is hardly the way to achieve this objective.

      1. vlade

        The problem is, as Michael Pettis has documented over years, that China has claimed to want to move to consumer-driven economy, while doing very little to actually achieve that. IMO, the problem with consumer driven economy is that it’s much harder to control (because it’s super-fragmented), unless you go Soviet on it (which requires de-fragmentation, which causes its own problems), and the CCP is not really willing to drop as much control of the economy, preferring to control it via the industries.

        1. Thuto

          I could be wrong but I think what Pettis documented mostly pre-dates what Trump has done I.e. turn what was mostly anti-China rhetoric pre-Trump into a full blown trade war now. IMO Trump has given China the kick up the backside that it needed to finally start doing something about accelerating the transition to an internal consumption driven economy.

          The problem as you point out will be maintaining the same level of control over an economy that becomes fragmented as it moves towards being consumer driven, i’m not sure how they will achieve this but the best minds within the CCP will have to come up with a solution.

          1. vlade

            When you look at the post-CV data, the China’s recovery (let’s assume there’s one, there some playing with the data, like moving Sep 2019 data into Oct 19 to make the quarter look better in 2020) is driven by investment, the consumption is way down. Don’t have the link now, but that’s what I remember from about a month ago.

            1. PlutoniumKun

              I don’t have time to check up the data either, but Michael Pettis has I think basically argued that China is pursuing incompatible policies with regard to internal consumption and the value of the yuan, not to mention the inevitable focus in their recovery plan on yet more infrastructure. Something has to give, and its probably the consumer side of the equation, yet again. To make a real turn in the Chinese economy to consumption over investment and saving means making very fundamental change to how the economy is run, and it seems that while the CCP is aware of what needs to be done, they haven’t worked out how to do it without angering lots of powerful internal interests.

              As for Ma, it seems to me that he made the mistake of becoming a ‘tall poppy’, and so practically invited getting cut down to size. As so often in China, policies are often combined – so anti corruption drives seem to coincidentally involve the discoveries of corruption among people who have fallen out of favour with Xi, so its inevitable that attempts to prevent even more internal debt build up will focus on business people who forget their place.

              As for your Czech example, the Chinese favouring of foreign companies that act as proxies for influence making goes back a long way. Rupert Murdoch is one high profile beneficiary. In 1994 the BBC was pretty much expelled from China for having the audacity to have a report on conditions on Chinese orphanages, which at that time were overwhelmed with girls as the one child policy encouraged parents to abandon unwanted children. Murdoch gained access via his Star channel, and mysteriously all articles that were even slightly critical of China for disappeared from his networks for many years, not to mention the BBC being knocked off his satellites broadcasting in Asia.

  3. Sound of the Suburbs

    The Chinese aren’t using neoclassical economics, are they?
    They are making all the classic mistakes, they must be.

    Everyone that uses neoclassical economics trips up over the “cost of living”.
    Disposable income = wages – (taxes + the cost of living)
    Taxes and the cost of living sum together in the same brackets, so it shouldn’t be hard, but today’s policymakers don’t have the equation.

    The Chinese have been trying to increase consumption, but they were using neoclassical economics.
    Davos 2019 – The Chinese have now realised high housing costs eat into consumer spending and they wanted to increase internal consumption.
    They let real estate rip and have now realised why that wasn’t a good idea.

    The equation makes it so easy.
    Disposable income = wages – (taxes + the cost of living)
    The cost of living term goes up.
    The disposable income term goes down.
    They didn’t have the equation, they used neoclassical economics.
    The Chinese had to learn the hard way and it took years.

    Chinese policymakers headed straight for a financial crisis
    That always happens with neoclassical economics.

    At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
    Policymakers set a course for a financial crisis because they have no idea what they are doing with this dire economics.
    1929 – US
    1991 – Japan
    2008 – US, UK and Euro-zone
    The PBoC saw the Chinese Minsky Moment coming and you can too by looking at the chart above.
    The Chinese are on the edge of a financial crisis and they really need to be very careful at this stage.
    They need to keep a tight rein on debt in the Chinese economy.

    1. Sound of the Suburbs

      What are those yellow vests doing on the streets of France, Macron?
      The “cost of living” trips everyone up that uses neoclassical economics.

      See what I mean?

    2. Tom Pfotzer

      What they need even more than “keeping a tight reign on debt” is to allocate the proceeds of debt wisely.

      This is where the West went off the rails.

      Debt is just fine – even astronomical amounts of it – _IF_ the debt proceeds are allocated well.

      And that’s the trick: allocate well. Public, corporate or household debt all face the same challenge: what do you allocate that buying power to?

      1. Sound of the Suburbs

        The Chinese have been doing something we didn’t see in the West.
        Learning from their mistakes.
        They have made all the classic mistakes everyone makes that uses neoclassical economics, but they learn from them to ensure they don’t make those mistakes again.

        Davos 2018 – The Chinese know financial crises come from the private debt-to-GDP ratio and inflated asset prices
        The black swan flies in under our policymakers’ radar.
        They are looking at public debt and consumer price inflation, while the problems are developing in private debt and asset price inflation.
        The PBoC knew how to spot a Minsky Moment coming, unlike the FED, BoE, ECB and BoJ.

        The Chinese know inflated asset prices are a problem, and tried to help the Americans by pointing out the US stock market was at 1929 levels in 2018.

        Davos 2019 – The Chinese know bank lending needs to be directed into areas that grow the economy and that their earlier stimulus went into the wrong places.
        They had pumped bank credit into areas that don’t grow GDP and the private debt-to-GDP had risen to a level they were on the verge of a financial crisis.
        Everyone does that with neoclassical economics, but they don’t usually see the financial crisis coming.

  4. Tom Pfotzer

    Boy is this going to be fun to watch, and even more fun to learn from. Go China! I hope you succeed in your efforts to set your own destiny.

    I always viewed the recent “trade war” with China as the moment when the West learned they can’t subvert China with debt (the new Opium). The West, fronted by Kissinger et. al. got out-maneuvered in the past few decades. The Chinese were the recipient of the greatest transfer of tech in history, and all the West got was a few decades of largesse for our “elite”.

    The Belt and Road initiative signals the incipient shift from trans-Pacific trade to EurAsian trade, leaving much of the Anglosphere out of the loop. And it looks like a most of that EurAsian trade can be conducted overland .vs. sea lanes.

    Seems like there might be rough times for our elite, because in addition to reductions in profits from / access to the massive and rising Chinese middle class, they are facing the emergent wrath of the flyover states – proxy for our middle class – whose welfare was sacrificed on behalf of the West’s “elites” short-term enrichment.

    There’s a lot of “new narrative” work to be done in order to deflect blame. Bad China! Bad Russia! Bad Iran! Bad Germany!

    Does this sound un-American? I’m wearing a flag on my lapel, so I’m definitely patriotic.

    I think the American flag stands for winning by achievement (among other wonderful and useful things). I would like to see America re-dedicate itself to winning by constructive achievement.

    So here’s a great opportunity for we Americans to do a reverse tech-transfer, and get something of great value back from our enormous investment in China.

    1. Jeremy Grimm

      I couldn’t arrive at your conclusion from what I understood of your comment.
      “… great opportunity for we Americans to do a reverse tech-transfer, and get something of great value back from our enormous investment in China”:
      What exactly is that great opportunity you see?

      1. Tom Pfotzer

        The learning opportunity is for the U.S. society to learn (maybe from China) to force the elite to act in the interests of their host society, instead of exclusively in their own (elite’s) interest at the expense of that society.

        Apparently, and I agree this is most unusual, the intent of Chinese national governance is to improve the lot of the people. And if you look at the numbers (societal well-being) over the past several decades, the Chinese governance – both gov’t and the governed – has delivered well on that stated goal.

        Contrast the Chinese government’s performance with that of most Western governments, and especially here in the U.S. The American middle and lower classes are getting stepped on in a big, long-term, systematic sort of way, and it’s well-documented, e.g. not sharing in productivity gains, wage and purchasing power diminishing, wealth concentration, degradation of the commons (like our currency, our environment, our institutions, etc.).

        So, if the Chinese can learn how to force the rich to benefit everyone else as they benefit themselves, maybe we can take notes and replicate their success.

  5. chuck roast

    This post reveals a lot about China. China is well along the capitalist road, but clearly their speed limits are safely within reason and widely enforced. Ma however, appears to be riding in Mikhail Khodorkovsky old limo. Moreover, he seems to have employed the ex-con’s chauffeur. I’m guessing that Jack Ma is under the illusion that Lanny Brueuer is now serving at a high level in the CCP Justice Ministry. He probably has a nice mansion set up in Vancouver just in case. If he persists in pay-day loan schemes, he just may need it.

    I love the sardines anecdote. Whiskey sales are big favorite at all the auction houses. Here is a current auction. Bid now, and if everything crashes into the basement, you can literally drown your sorrows.

  6. Palaver

    The Southern Korean model of suicidal household debt levels and evaporating birth rates doesn’t align with The Party’s 5 year plan.

    You can’t conquer the world with a miserable self indulgent generation with no evolutionary stake in the future. That’s should be the disease that ails the West, the opium in their MAGA pipe dreams.

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