Ant Group's planned $34.4 billion initial public offering for the Shanghai and Hong Kong exchanges is dead. Chinese regulators killed it.
That's a big setback for Alibaba Group Holding (BABA, Financial), which would have been the biggest beneficiary from the IPO that was oversubscribed. Alibaba will continue to hold a third of Ant's shares after the stock's debut.
Alibaba's shares were sharply lower on Wall Street on Tuesday.
Chinese regulators killed Ant's IPO because the company had "major" financial technology regulatory issues.
That's the official reason.
But there is arguably an unofficial reason as well. Ant Group's meteoric rise threatens China's state-owned banking system, the "honey-pot" of the Chinese government.
When Alibaba started Taobao, a customer-to-customer site, back in 2004, e-commerce didn't exist in China for a simple reason: lack of a payment system. Jack Ma, the founder of the company, had to invent one.
"Immediately, he put his staff to work," Edward Tse wrote in the 2015 book, "China's Disruptors." "Across China, Taobao opened bank accounts in branches of every bank in every city, depositing just enough money into each one of them to ensure that transactions would be cleared… By incorporating an escrow function at the heart of the process, and thus guaranteeing its ability to fulfill its customers' pay requests, Taobao built confidence into the very idea of e-commerce."
Soon, Alibaba's payment system, known as Alipay, was processing close to 50% of online transactions, helping it dominate Chinese e-commerce.
But Ma didn't want just to change e-commerce. He wanted to change state-owned banks. In 2008, Alipay created a financing arm to provide small loans to Alibaba.com users. And in 2013, the company upped the game by introducing a popular money-market product called Yu'e Bao ("extra treasure").
"What made Yu'e Bao attractive was that it offered savers better return than the notoriously low rates offered by China's banks," Tse wrote. "A year after its launch, some 100 million people had opened Yu'e Bao accounts, depositing the equivalent of $93 Billion."
The rest is history. Alipay was eventually spun off from Alibaba, changed its name to Ant Group and began preparing for an IPO, which is on hold for now.
Apparently, Ma wasn't just trying to change state banks; he was challenging the dominant role they played in the Chinese economy for more than seven decades.
In essence, Ma and Alibaba are trying to change the balance between central planning and China's market economy.
That's very likely to unleash a political backlash against the company and slow its robust growth substantially.
The killing of Ant's IPO may be just the beginning.
Disclosure: I don't own any shares of Alibaba.
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