Jack Ma's Ant IPO Tests China's Tolerance of Entrepreneurship

Is China's most successful entrepreneur now a target?

As the second-largest economy in the world, China garners a lot of attention. That attention has been heightened due to one of the superstars of China's growth story, Jack Ma, seemingly finding himself the target of China's ruling party. Ma has been largely absent after pulling what was expected to be a massive initial public offering (IPO) of his large fintech company Ant. We'll look at what led to the halting of the IPO and what it might signal for entrepreneurship in China.

Key Takeaways

  • Jack Ma's planned IPO of Ant Group has been called off—reportedly at the behest of President Xi.
  • Ma's companies now find themselves under increasing government scrutiny and proposed new antimonopoly rules.
  • The turn against domestic entrepreneurship in China could make it a less attractive target for foreign direct investment (FDI).

China's Take on a Market Economy

China has made a habit of confounding many of the predictions made about it beyond the main one of growth. Prognosticators and pundits have long made calls on how opening the economy would move China along the road to more of a democratic model. While China has opened up in many, many ways in the past few decades, President Xi Jinping has removed his own term limits and looks to be consolidating more power in the ruling party. So in some ways, China is moving further away from democratic reform even as it continues down the road of opening its economy.

The version of the market economy that China has embraced is similarly uneven. Owning a small to medium-sized business in China is encouraged, and entrepreneurship was a major driver of growth in the economy. Due to the scale of China's economy, many medium-sized businesses are in fact quite large in terms of global ranking. However, large sections of the domestic economy still have state-owned enterprises (SOEs) at the top, which work in concert with regulators.

Somehow, China still continues to push ahead through what appears to be a maze of contradictions to outside observers. Case in point: we are looking at the seeming censure of Jack Ma, one of China's most successful tech entrepreneurs, but this saga is playing out at the same time as China is poised to give unprecedented access to its financial sector to Wall Street investment banks.

Alibaba, Ant, and Ma

Jack Ma is China's richest person, and he created that wealth through Alibaba Holding Group Limited (BABA) and its payment and financial service twin Ant Group that grew out of Alipay—a system designed to support the core e-commerce business. The two companies taken together have an enormous presence in China and have enjoyed surprisingly little regulatory pushback up until now.

There were skirmishes between Ma's companies and the Chinese regulators, but the intensity has been heating up in the past few years. Alibaba now finds itself under an antitrust investigation, Ant is in the targets of regulators at the People's Bank of China (the central bank), and new draft antimonopoly rules seem squarely aimed at Ma's empire, as they deal specifically with consumer data and differential pricing. The question is why this is all happening now. 

The answer seems to be that Ma upset the wrong people. A speech given by Ma in Shanghai in October where he was very critical of regulators has been reported as the trigger for President Xi personally intervening to halt the IPO and force Ant Group to shrink down to a pure payments service.

Whereas Alibaba sticks largely to e-commerce, Ant's fintech presence ultimately encroaches on an area where SOEs still rule—banking and financial services. So even as China opens up part of its financial sector to foreign financial firms, it is moving to rein in homegrown competition to state-owned commercial banks.

The Bottom Line: What Jack Ma’s Troubles Mean for the Market

Investors are not going to flee China due to a regulatory crackdown. In fact, The Goldman Sachs Group, Inc. (GS) has already announced that it is all in on buying up the rest of its joining venture in China's financial sector, and its shares are up 20% since the December announcement. While the share rise is not solely due to investing further in China, it shows that the market isn't too concerned about China exposure despite Ma's troubles. Alibaba stock is, of course, down, and Ma is staying far away from the limelight.

In a broader sense, however, the actions against Ma's companies are more about how much internal entrepreneurship China's ruling party can stomach rather than how much foreign investment the country will allow. If China is too heavy-handed in its treatment of domestic entrepreneurs, it may throw into question the permanence of its market reforms to date and the political commitment to future ones. That wouldn't be guaranteed to send the Goldman Sachs of the world running given the size of the market, but it might cause second thoughts for more cautious market players.

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