Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Ant Group helps Shanghai become Global Financial Capitol

Americans distracted by the election and Trump derangement syndrome are missing the biggest economic story of the year. The center of the world’s financial markets has moved to China.

They are holding the largest and hottest stock offering the year, Ant Group’s $34.5 billion IPO, in Shanghai and Hong Kong–not New York. In fact, Ant is holding its initial public offering (IPO) on Shanghai’s Star Market.

Ant’s choice of a market is fascinating because the Shanghai Exchange Science and Technology Innovation Board; or the STAR Market, is a little over a year old. They launched the STAR Market in July 2019. In contrast, Wall Street’s New York Stock Exchange (NYSE) is 228 years old.

Is Shanghai the World’s Stock Market?

I think Shanghai could replace New York as the world’s financial capitol because its traders and speculators can raise enormous amounts of money.

Startlingly, STAR Market traders made $2.9 trillion (19.1 trillion Yuan) in bids for Ant Group, Markets Insider estimates. Additionally, Hong Kong buyers made $168 billion (1.3 trillion Yuan) in bids for Ant shares.

Incredibly, traders oversubscribed Ant’s Shanghai offering by 872 times Market Insider claims. Moreover, traders oversubscribed Ant’s Hong Kong offering by 389 times.

Ant Group claims that it its IPO has raised more cash than any other offering in history. Consequently, I think we will see a flood of STAR Market IPOs as companies stampede to Shanghai and Hong Kong to take advantage of the bonanza.

I predict many American and European companies will join that stampede. I expect many historic American companies will try to list in Shanghai and Hong Kong. Moreover, many new companies will forgo Wall Street for Shanghai.

Is Shanghai the World’s Financial Capitol?

Americans need to be afraid because the world’s investors and speculators have voted with their money and elected China the global financial leader.

Shanghai’s ascendancy could be the story of the century because the global financial capitol, has only moved three times in modern history. The modern financial markets began in the Netherlands around 1602 with the launch of the Dutch East India Company (VOC). The VOC was the first modern stock company.

However, the Netherlands was small and weak to become a major power. In particular, Holland is on the European mainland. The Dutch had to devote most of their resources to defending themselves from giant European powers such as the predatory Spanish Empire.

The Center of the world’s financial markets moved to London after the Glorious Revolution of 1688. In the Glorious Revolution, the Dutch Prince William III of Orange overthrew the Stuart Dynasty, establishing a parliamentary monarchy in the United Kingdom.

After the Glorious Revolution, the British adopted all the Dutch style economic innovations including a Central Bank, the Bank of England, and stock markets. By 1700, the City of London had become the first global financial center.

London remained the Global Financial Capitol until World War I. During World War I, the United States; already the world’s top industrial nation, emerged as the greatest economic power. By 1920, Wall Street had emerged as the Worlds’ financial capitol.

Sorry America China Just Won

Now, a century later, after the shock of the Coronavirus Pandemic, the Global Financial Capital has moved to Shanghai. The Peoples Republic of China is emerging as the world’s dominant financial power.

China’s economic power has been emerging for over a decade. The top three US IPOs of all time were Chinese companies. Those companies were Alibaba (NYSE: BABA) $25 billion in 2014; the Agricultural Bank of China (AgBank) for $22.1 billion in 2010, and the ICBC Bank (Industrial and Commercial Bank of China (OTCMKTS: IDCBF) for $21.9 billion in 2007.

However, all three companies listed on US markets. Ant Group has ignored US markets, a strategy that investors love. I think one reason Ant Group is popular is America’s failure to deal with coronavirus.

Coronavirus Defeats America

For example, Worldometers estimates the United States had suffered 236,011 coronavirus deaths by 1 November 2020. In contrast, the People’s Republic had suffered 4,634 coronavirus deaths on the same day.

Dramatically, Johns Hopkins University estimates that authorities detected 99,231 new coronavirus cases in the United States on 30 November 2020. Notably, they held the Ant Group IPO the same week. That exceeds the total number of coronavirus cases reported in the People’s Republic of China 85,997. Interestingly, they reported 24 new coronavirus cases in China on 1 November 2020.

One reason investors are buying Chinese shares is that the US gross domestic product (GDP) shrank by 31.4% in 2nd Quarter 2020 because of coronavirus. To be fair, US GDP grew by 33.1% in third quarter 2020.

I think many investors fear another US GDP collapse if the coronavirus epidemic gets worse. The fear is that the US economy is more vulnerable to coronavirus than China’s. Fears of civil unrest fueled by income inequality and an unresponsive political system in the United States increase the skepticism in America. 

Similarly, CNBC’s Hugh Son observes that thousands of high-income financial professionals are leaving New York City. New York was hard hit by coronavirus and riots in 2020.

America Has Lost the World’s Financial Capitol

History has repeated itself. The world’s financial capitol has moved from New York because of the catastrophe of coronavirus, just as London lost the financial capitol because of the catastrophe of World War I.

Interestingly, some American officials are trying to resist history. Hardliners in the Donald J. Trump (R-Florida) administration are considering adding Ant Group to the U.S. State Department’s blacklist, Reuters claims.

Adding Ant to the blacklist could prevent Americans from buying its shares on US stock markets. However, Americans could still buy Ant shares through middlemen in China or elsewhere.

I think one obvious scandal that could develop is Trump administration officials buying Ant Stock while preventing ordinary Americans from investing in Ant. Likewise, I predict Wall Street will put pressure on Trump and his possible successor Joe Biden (D-Delaware) to allow Ant to trade on American exchanges.

To elaborate, I think the money Americans could make from Ant shares will overcome patriotism and xenophobia. However, I predict we will see US attempts to throttle the Chinese stock markets, but all of them will fail.

In fact, I think those attempts will drive more money to China as investors fear an increasingly irrational, weak, ineffective, and xenophobic US government. If the US presidential election leads to chaos, it will boost the Chinese stock market.

What is Ant Group?

Ant Group, formerly Ant Financial, was the world’s most valuable unicorn; pre-IPO company for several years.

Ant Group is a financial technology and financial service company similar to PayPal (NASDAQ: PYPL). Ant’s signature product is Alipay, Alibaba’s (BABA) digital wallet. Alipay had 1.3 billion active users in March 2020, Techcrunch estimates. Alibaba spun Ant off into an independent company in 2011.

The Alipay app is a gateway that gives users access to a wide variety of third-party financial services. Ant is a major player in financial services. Those services include digital payments, insurance, and wealth management.

 Ant’s wealth management unit had $570 million (four trillion) in assets under management in March 2020, Techcrunch claims. Bloomberg estimates Ant had $173 billion in its Yu’ebao proprietary money market fund in 2020. Yu’ebao is the world’s largest proprietary money market fund, Reuters claims. Ant’s InsureTech unit works with over 90 Chinese insurers.

Ant offers mutual funds from 20 managers, including American giants Invesco and Vanguard. Ant’s InvestmentTech unit facilitated 4.1 trillion Yuan ($610 billion) worth of investments through Yu’ebao through June 2020. Yu’ebao and InvestTech offer third-party products from 170 asset managers.

How Ant Group Makes Money

Goldman Sachs (GS) estimates Ant Group could issue $290 billion worth of consumer loans by 2021.  Ant’s lending platforms Huabei (Just Spend) and Jiebei (Just Lend) loaned money to 500 million people between June 2019 and June 2020. The loans are unsecured but Ant makes money by charing 15% interest on them.

Ant’s CreditTech business, which includes Huabei and Jiebei, is its biggest moneymaker. CreditTech generated 39% of Ant’s revenues in the first sixth months of 2020, Bloomberg claims. CreditTech had a lending balance of 2.1 trillion Yuan ($310 billion) in June 2020, around 1.7 trillion ($250 billion) of that balance was consumer credit, Reuters claims.

Moreover, Bloomberg estimate Xianghubao Ant’s health insurance scheme covers 107 million people. InsureTech offers policies from 90 Chinese insurance companies.

Alipay controls around 55% of China’s mobile payments market and had around 711 million active users in 2020, Bloomberg estimates.

Alipay processed $17 trillion in payments between June 2019 and June 2020, Bloomberg claims. Alipay generates around 30% of Ant Group’s revenues.

Ant generated around 50% of its revenues from technology service fees in 2019. Ant CEO Hu Xiaoming wants technology-service fees to account for 80% of its revenues.

Ant is moving out of financial services because of pressure from Chinese financial regulators and the People’s Bank of China. Instead, Ant is trying to rebrand itself as a Fintech company similar to PayPal (PYPL).

Alibaba (BABA) owns around 33% of Ant Group. Alibaba founder Jack Ma owns 50.1% of Ant Group, Bloomberg estimates.

How Much Money does Ant Group Make?

Ant Group reported 72.5 billion Yuan ($10.50 billion) in revenues and 21.9 billion Yuan ($3.27 billion) in revenues in the first six months of 2020, Reuters estimates.

Ant’s revenues grew by 38% between the first half of 2019 and the first half of 2020. Analysts valued Ant Group at over $200 billion in August 2020.

I think Ant could be a good stock to buy because it is an IPO that really makes money. Unfortunately, Americans cannot buy Ant Group shares now. However, Americans can buy Alibaba (NSYE: BABA) stock. Mr. Market paid $304.69 for BABA shares on 30 October 2030. Alibaba owns around 33% of Ant Group.

I think Ant Group shows that Shanghai could the world’s financial capitol and China the world’s dominant financial power. Only history will tell how Americans react to that reality.

Yes, China is Number One Get Used to It America

However, America bears will note the United Kingdom has never truly adapted to its loss of empire and status. Moreover, history shows America could keep its influence and military power for a long time.

The British Empire remained the world’s dominant military power until the rise of the Soviet Union, the Japanese Empire, and the Third Reich in the 1930s. Moreover, Britain’s status as the world’s leading power lasted until the Fall of France, the evacuation of Dunkirk, and the Battle of Britain in the Summer of 1940.

Britain collapsed quickly in 1940 when Hitler showed the world that the United Kingdom could not defend itself; or wage war, without American help. I think America’s failure to contain coronavirus resembles Britain’s military catastrophe in 1940.

Even though America became the world’s dominant financial power in World War I, the USA did not become the world’s dominant military and political force until World War II. Only history will show if America’s military and political power will collapse as fast as its financial power.