Time to Let Ant IPO!

Or the IPO "wealth drain" will continue

This week marks the 4th anniversary of Jack Ma’s infamous Bund Finance Summit in Shanghai that, among other things, led to the cancellation of Ant Group’s IPO. The IPO was geared up to be the largest ever – 34.5 billion USD. It was also supposed to be a rare, joint listing in both Hong Kong and Shanghai, which would’ve put the home of the Oriental Pearl on the map as a destination where premium tech companies could go public. The Shanghai portion of the IPO was oversubscribed by 872 times! 

None of that happened, of course. For the next four years, Ant was in the “regulatory doghouse”. To comply and show good attitude, Ant broke itself up into several independently-run businesses. It did a share buyback program and issued three rounds of dividends to the likes of Carlyle and Temasek, who were major overseas shareholders and got screwed out of a big payday. It paid 7.1 billion yuan ($994 million) in fines to financial regulators. Jack Ma reduced his stake in Ant and controlling power.

Meanwhile, Alibaba was going through its own version of the “regulatory doghouse” – a three year journey that included a 18.2 billion yuan ($2.8 billion) fine for practicing the anti-competitive “pick one from two” scheme. This clean up did not officially wrap up until a month or so ago, when the State Administration for Market Regulations (SAMR) issued a statement declaring Alibaba properly “rectified”.

So is it time to rekindle Ant’s IPO dream?

I think so, though not just because the company probably deserves to be put back on track after four years of regulatory torture, but because China, at this critical juncture of its economic development, needs a blockbuster domestic IPO more than ever.

The IPO “Wealth Drain”

Most people are familiar with the concept of “brain drain” – talented people from one country leaving to study, work, and flourish in another country. There is an analogous version of this concept in the global capital market – an IPO “wealth drain”, if you will – where companies built on the talent and economic growth of one country goes public in another country, while retail investors from the home country can’t easy invest and access the wealth such an IPO may create.

Alibaba is the poster child of this phenomenon. After a subdued listing of its Alibaba.com subsidiary in 2007 in Hong Kong – an event few people remember – Alibaba Group executed the largest IPO at the time in September 2014 on the New York Stock Exchange (NYSE). It was all rainbow and roses for Softbank, other sophisticated institutional shareholders, and employees who had equity, but for an average investor in China whose online shopping budget contributed to Taobao’s top and bottom line, it was a deal of the decade that they could not participate in. And being locked out of the wealth created by Alibaba shares appreciation lasted for a decade, until just a few weeks ago, when the company finally completed a primary listing on the Hong Kong Stock Exchange. This listing status now lets Mainland Chinese retail investors to buy its shares easily through the Stock Connect Program, which as I wrote before may be too little too late for wealth creation. 

Today, shares of leading tech companies like Pinduoduo and Baidu still do not have primary listing status in Hong Kong, and thus are difficult to access for the same reasons that Alibaba shares used to be. And for ambitious, up-and-coming tech companies in China, an IPO in Shanghai would still be considered a “minor failure”, a Hong Kong listing would be a decent outcome, and an IPO on Wall Street is still the crown jewel, even in the face of all the geopolitical headwinds and extra regulatory hoops to jump through.

Pony AI is the latest example of this “wealth drain”. Arguably the best robotaxi company in China from a technology perspective, Pony filed for a NASDAQ IPO last week. Its deployment is almost entirely in China, having secured licenses in all the tier-1 cities – Beijing, Shanghai, Guangzhou, Shenzhen – yet for its riders, its shares would be more difficult to grab than its robotaxis.

Zeekr, an EV brand owned by Geely, also went public on the NYSE, not Hong Kong or Shanghai. Even though it has almost no business prospects in the US thanks to tariffs and other restrictions for being a Chinese-made connected vehicle, and its “innovation”, the latest of which is a hotpot table in its luxury minivan, is hardly relatable outside of China, Wall Street money was still the preferred choice. While its share price has been mostly flat, Zeekr’s oversubscribed IPO raised a solid $441 million dollars. 

Do you see that hotpot table? I do! Source: Bloomberg

Had the Ant IPO gone through in 2020, or even in 2022 as it was speculated at the time, would Pony or Zeekr have considered a domestic listing as more viable to fetch the valuation and raise the amount of capital it was hoping to? We will never know. But we do know that until a marquee tech company successfully lists in Shanghai – a path Ant was happy to pursue four years ago – the “wealth drain” will continue. 

Money Come Home

The IPO “wealth drain” is a symptom of large structural problems. These problems, all complex in their own right, can be summed up as such: Chinese money prefers to stay abroad than come home.

Gavekal Research illustrated this phenomenon on the macro-level in its China Quandray deck. Even though the Chinese economy has been uninspiring this year with missing its “around 5%” GDP target a real possibility, exports continue to do well. 

How well? $80 billion dollars in surplus per month!

A combination of recovering demand overseas and unrelenting capacity (or overcapacity?) building at home to produce cheaper and better goods to be sold continues to power China as an export-led economy, tariffs and geopolitics be damned. But where is the money made from export sitting? 

Abroad not at home. 

How much is sitting abroad?

7 trillion, and counting.

Gavekal Research: The China Quandray

And what is this 7 trillion doing abroad?

Apparently buying gold, sitting in banks, or accumulating US tech stocks.

Gavekal Research: The China Quandray

As if the Mag 7 trade isn’t crowded enough, let’s add another source of price insensitive capital to the flow – Chinese trade surplus. 

While the option to invest money abroad is available to large, sophisticated exporters or rich elites with accounts everywhere, that optionality is a pipe dream for your ordinary uncles and aunties, looking to grow or preserve some hard-earned wealth. The net benefits for ordinary consumers of the “wealth effect” from stock market appreciation has been well documented in the US context. A comparable case study hardly exists in the China context because its domestic stock market doesn’t even have its best companies. There are only so many shares of Moutai (or bottles of Moutai) one should buy with one’s life savings. (Kweichow Moutai, the maker of luxury brand Chinese liquor, has the largest market cap on the Shanghai Stock Exchange.)

Will an Ant Group IPO change things overnight? No, but it will be a step in the right direction. Even with all the regulatory overhang, the company did not stop growing and innovating. At home, AliPay continues to be a dominant interface for all things fintech and digital living. It is forging partnerships with the likes of Mastercard to help foreign travelers ease into the digital-first lifestyle of modern China and expand abroad. It is launching a suite of LLM-powered chatbots in personal assistant, wealth management, and health – outpacing its US counterparts like PayPal and Block. And it continues to invest in the less sexy but equally important IT infrastructure layer with its home-grown database solution, Oceanbase, one of its most prominent spinouts during its last four years of “reform”.

To “celebrate” this four-year anniversary of the Jack Ma speech (a weird thing to celebrate, I know), I re-listened to it in its original form. (You can too here, if you can understand or tolerate his Hangzhou accent, or read my translation of it.) Thinking back on everything that happened since, his tone was clearly too aggressive for his own good, but the substance of his central message was sincere and warranted – China needs regulations designed from first principles, not blindly copying the West, so its best tech companies want to stay and create wealth at home. 

Time to dust off those prospectus and let Ant IPO. Otherwise, Chinese wealth, and Chinese innovation, may never come home.