Market Mad House

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


Why Did China Kill the Ant IPO?

Americans missed the business story of the year because the election distracted them. Chinese authorities blocked Ant Group’s $39.5 billion initial public offering (IPO) with new FinTech regulations.

They announced the new regulations on 2 November 2020 just three days before the IPO. New banking rules will require internet platforms to put up 30% of the capital for joint Chinese loans with banks, The South China Morning Post reports.

To explain, regulators want Ant to have more skin in the game of lending and not pass all the risks onto others. Ant currently backs 2% of the loans made through its Huabei and Jiebei merchant lending platforms. I think regulators fear Huabei and Jiebei will issue enormous numbers of bad loans, lose money, and collapse.

Why Chinese Regulators are Afraid of Ant Group

The fear is that Huabei and Jiebei are generating bad debt and passing it onto investors. A similar doom loop using mortgage-backed securities led to America’s 2007-2008 financial crisis.

To explain, during America’s mortgage crisis of the early 2000s, lenders wrote tens of thousands of bad mortgages, including the infamous NINJA (No income job) loans. Bankers then packaged the mortgages into securities and sold them to investors. When the bad mortgages went unpaid, the house of cards collapsed.

The new regulations are vague, The South China Morning Post claims Ant executives do not know what they say. Instead, there is no clear definition of loans.

Hence, it is unclear what Ant’s business model is. Therefore, it will be irresponsible, unethical, and probably illegal for Ant to sell stock. Hence, the IPO is off for the foreseeable future.

A Dangerous Financial Product

As usual some media outlets are pushing a simple yet wrong story about the Ant IPO.

The problem with this narrative is that it ignores some complex and dangerous truths about Ant Group. I think the People’s Bank of China (PBOC), and the China Banking and Insurance Regulatory Commission (CBIRC) have legitimate concerns about Ant’s lending.

I think PBOC bankers and CBIRC regulators fear Ant could run out of money and leave hundreds of thousands or millions of Chinese businesses without cash. Moreover, the PBOC bankers are afraid they will have to bail out Ant in the same way America’s Federal Reserve had to bail out Wall Street in 2008.

Huabei and Jiebei offer loans from over 100 banks to merchants. Any problem with them could crash China’s economy and launch a global recession. If Huabei and Jiebei are repackaging and reselling bad loans, they could collapse.

One frightening possibility is that Ant is out of money and was planning to use the IPO to raise enough cash to stay in operation. Huabei and Jiebei could lose money. Ant executives could have been planning to use the stock market to cover the losses from bad lending.

The PBOC pulled the plug on the IPO to prevent Ant from crashing the stock market and the banking system and ruining millions of small investors.

What about America?

America’s media is afraid to mention this all-too real possibility because it raises questions about our own economy. In particular, the venture capital and credit-driven buying frenzy on Wall Street, the overpriced real estate market, and the IPO boom underway.

Moreover, I have to wonder about the stability and safety of American FinTech products such as PayPal, Venmo, Square’s Cash App, Apple Pay, Google Pay, Robin Hood, and Goldman Sachs’ Marcus artificial intelligence loan platform. Could those products be as dangerous and as unstable as Huabei and Jiebei?

What happens if PayPal (PYPL), Apple Pay, Square (SQ), or Robin Hood runs out of money? Just imagine the panic that will break out if millions of Apple Pay or PayPal users find their app does not work at the grocery store or the gas pump. Will those companies’ CEOs appear at the Federal Reserve or the US Treasury begging for a bailout?

Can it Happen Here?

Or what about a virtual panic as millions of people try to pull all their money out of the Cash App or Robin Hood at once? Remember, bank runs and a giant stock sell off began the Great Depression of the 1930s.

These ideas sound farfetched but General Motors (GM), Morgan Stanley (MS), Citgroup (NYSE: C), Wells Fargo (WFC), and Goldman Sachs (GS) begging for federal help sounded preposterous in 2005. In 2008, that happened, those companies and other giants were begging for government help.  Things got so bad the US Congress had to set up a $700 billion Troubled Asset Relief Program (TARP) to save Wall Street from itself.

Hence, the blocking of the Ant IPO could be a responsible regulatory action and a sign of deep problems with today’s FinTech ecosystem. The major problem is that companies such as Ant and Square are putting dangerous financial products in ordinary people’s hands.

Dangerous New Financial Products

To explain, Huabei and Jiebei allow ordinary people to shop around for bank loans while the Cash App and Robin allow people to invest in dangerous and experimental derivative products such as cryptocurrencies. For example, Square Inc. (NYSE: SQ) claims its Cash App generated $875 million in Bitcoin (BTC) revenue in 2nd Quarter 2020.

In particular, Square claims the Cash App’s Bitcoin revenues grew by 600% in Second Quarter 2020, reports. Square claims the Cash App’s Bitcoin revenues grew by 600% in Second Quarter 2020, reports.

Notably, Ant Group reminds me of two cryptocurrency schemes the US government has been trying to kill. To elaborate, Ant is a payments ecosystem that gives ordinary people access to a wide variety of investment and financial products through its Alipay digital wallet.

Ant’s Similarities to Libra and TON

In particular, Facebook’s (FB) Libra is a plan for a simple global payment system and financial infrastructure that empowers billions of people. Libra is a cryptocurrency; or stablecoin, users access through a digital wallet.

Libra and its creator Mark Zuckerberg earned the displeasure of the US Congress. Thus, Jack Ma should have paid attention to Zuckerberg’s experiences. Nor was Zuckerberg alone.

The US Securities and Exchange Commission (SEC), America’s CBIRC, came down hard on Russian tech mogul Pavel Durov and his Telegram Open Network (TON) cryptocurrency scheme. The SEC sued Durov, leading a federal court to order Telegram to return $1.2 billion to TON investors.

The TON was a proposed cryptocurrency designed to allow users to send money through Durov’s Telegram encrypted social media network. However, the SEC viewed TON as an end-run around US securities and banking laws. Just as the CBIRC views Ant as an effort to circumvent China’s banking laws.

I think Chinese regulators are trying to stop Ant from setting up an unregulated global payments network. In the same way, the SEC stopped Durov from turning Telegram into a payments network. Likewise, American political leaders view Libra correctly as an unregulated payments system.

Additionally, you can compare the Ant slap down to President Donald J. Trump’s (R-Florida) clumsy effort to shut down TikTok in the United States. Trump feared TikTok for the same reason Chinese leaders fear Ant Group.

The Donald fears TikTok will become a gigantic platform and data-harvesting machine the US government cannot control. Chinese leaders fear Ant could become an enormous payment processing and data-harvesting machine they cannot control. However, Trump has no objection to TikTok Global, a proposed American company that will operate TikTok in North America because Americans will harvest the data.

China Fears a Billionaire Class

Another reason the PBOC and the CBIRC stopped Ant’s IPO is to keep from China from becoming like America.

To explain, Chinese leaders fear the rise of a wealthy and powerful billionaire class in the People’s Republic. Communist Party leaders and regulators have seen the damage billionaire classes are causing in America and Russia. They want to block the rise of such a class in China.

Given the problems America’s billionaire class is causing, I sympathize with the Chinese leaders. They correctly see billionaires as a threat to them and stability. Billionaire classes have corrupted the American and Russian political systems. The Chinese are trying to avoid such corruption.

Another goal of the PBOC and CBIRC could be stop billionaires such as Ma from accumulating enormous fortunes through IPOs.  I almost want to vote for Xi Jinping for US President. Yes, Xi is a Communist, but he at least has the balls to slap billionaires down.

Much as US presidents Theodore Roosevelt (R-New York) and William Howard Taft (R-Ohio) did. Taft went after the world’s richest man, Standard Oil tycoon John D. Rockefeller Sr. and won. In 1911, the US Supreme Court ordered the dissolution of Rockefeller’s Standard Oil monopoly in a suit filed by Taft’s Justice Department.

Thus, the PBOC and CBIRC’s action resembles Taft’s attempt to control Standard Oil and its billionaire owner John D. Rockefeller. Rockefeller was ignoring laws and flaunting federal authority, much as Jack Ma was. Taft’s assault on Standard Oil ended America’s Robber Baron age and destroyed America’s Gilded Age plutocracy.

China Does Not Want to be America

One reason for the action against Ma is that Chinese leaders, including Xi, are trying to avoid America’s recent mistakes. To explain, America’s leaders failed to prevent the rise of a powerful billionaire class and financial industry that damages the nation.

Consequently, the United States has a corrupt and ineffective government incapable of solving the nation’s problems. Moreover, the new Robber Barons of the Second Gilded Age and their political allies have looted America’s national treasury, gutting the regulatory state, and undermining the welfare state. The result of the Robber Baron’s political program is rising poverty, growing income inequality, incredible corruption, and increasing civil unrest in the United States.

Chinese leaders are trying to avoid the same catastrophe. Moreover, many Chinese leaders correctly see modern American-style neoliberalism as a failed system they need to avoid. Today’s Chinese leaders see America’s current economic system as a failed experiment.

One reason for this was the rude awakening China received in 2008 when the US economy nearly collapsed. To elaborate, the 2008 Economic Meltdown nearly dragged China’s economy down along with America’s. In addition, the Chinese had to bail themselves out of the mess America created.

Keynes’ China

Thus, Chinese leaders are wary of American economic experiments and want to avoid them. Instead, I think the Chinese are trying to create a heavily regulated global Keynesian economic system.

To explain at the height of World War II, the great British economist John Maynard Keynes proposed a new world economic world order. Keynes’ proposed a global central bank; called an International Clearing Union and an international reserve currency he called the Bancor. They rejected Keynes’ ideas at the Bretton Woods Conference because of US opposition.

Similarly, the Chinese are experimenting with a new economic order in which the Central Bank makes all the decisions. Thus China could be the first nation run by its central bank.

The PBOC and not Xi Jinping and the Communist Party could the actual power in China. If that is the case, China could be the first country run by bankers, or at least central bank technocrats. Moreover, the PBOC increasingly sees itself as the world’s central bank. Mao Zedong is rolling over in his grave.

Notably, it is the PBOC that took the lead in slapping down Ma and pulling the plug on Ant. My guess is that the PBOC wants total control of China’s payments system. The PBOC sees Ant as a potential rival or threat it needs to control.

One of the greatest failures of America’s Federal Reserve has been its refusal to control or even acknowledge digital payments platforms such as Apple Pay or PayPal. Instead, I predict the Fed will let a platform such as Apple Pay spiral out of control and meltdown and not know how to pick up the pieces.

In the final analysis, the Chinese blockage of the Ant IPO could show that China is a healthier country than America in some ways. However, only history will tell if the Chinese government’s action will clear the way for China’s rise to economic dominance or mark the beginning of its decline.

Notably, America’s rise to economic dominance began in World War I, a few years after Taft’s destruction of Standard Oil and the defeat of the Robber Barons.