By Roselyn Hsueh*
The Chinese government created the Shanghai Stock Exchange Science and Technology Innovation Board (STAR) market in 2019 to allow domestic science and technology companies that align with national sector-specific strategies to bypass government approval, raise money and list internationally. The STAR registry promised more relaxed requirements on profitability and pricing based on registration and disclosure in line with global stock markets.
The dual listing of Alibaba’s Ant Group on the Hong Kong and Shanghai Stock Exchanges was scheduled to take place via STAR on 5 November 2020. But the Chinese government abruptly halted Ant Group’s US$37 billion stock debut two days before the scheduled initial public offering (IPO) due to regulatory scrutiny of the online wealth management and banking platform.
Now the development of China’s capital markets appears to be at stake. After the suspension of Ant Group’s dual IPO, many high-tech start-ups have abandoned efforts to list on the STAR registry. In March 2021, 76 companies suspended their IPO applications. This compares to half that number which suspended applications in February 2021 and 12 that did so in November 2020 when the Ant Group holdup occurred.
The Ant Group’s fate does not signal a crackdown on all companies or industries, or the development of Chinese capital markets more broadly. But it is a cautionary tale about state–market relations for strategic industries in Chinese-style state capitalism.
The increasing size and influence of state-sponsored private Chinese financial technology companies has come under scrutiny in the context of the state’s priorities of developing the national technology base while also addressing national security imperatives. Ant Group sits at the apex of strategic industries that the Chinese government wants to promote so they can achieve global competitiveness while still retaining authoritarian control over them.
The twists and turns of Ant Group’s growth and development are a case in point of how the state’s strategic priorities conflict with liberal market capitalism. The Chinese state has embraced liberal economic tools and deliberate state interventions in market coordination and property rights arrangements to achieve technological development, global economic integration and information control.
The story begins with Ant Group, known as Alipay in the early 2000s, the third-party online payment platform of e-commerce giant Alibaba. At the time, the Chinese government permitted foreign direct investment to develop homegrown value-added telecommunications services, but limited foreign investment to less than 10 per cent in state-owned fixed-line and mobile services despite China’s World Trade Organization commitments. US web service provider Yahoo was Alibaba’s top foreign investor.
In 2010, Alibaba unilaterally spun off Alipay, divesting Yahoo’s stake. Alibaba justified the move on the grounds that it was simply complying with a new government rule stipulating that only Chinese-owned companies could be licensed to engage in e-payment services. Alipay rebranded as Ant Group in 2014, right before Alibaba’s IPO without foreign investors as controlling partners. By 2016, Ant Group had raised US$4.5 billion from Chinese state-owned banks and Chinese private equity firms, including China Investment Corporation and Primavera Capital Group.
A decade after regulatory boosts benefited the rise of Alipay, and two decades after Alibaba’s first use of variable interest entities (VIEs) to court foreign direct investment, the 2020 updates to China’s Anti-Monopoly Law halted Ant Group’s dual IPO. The Anti-Monopoly Law overhaul vests Chinese regulators with the power to monitor the impact that internet companies have on the online sector, their scale and ability to control products and services, including in other industries. Penalties can force violators to divest assets, intellectual property or technologies, open up their infrastructure and adjust their algorithms.
The ‘systemic risk’ of the mixed operations of data-based financial platforms led the government to fine Alibaba US$2.8 billion for its monopoly position in digital finance. The government ordered Ant Group, under a separate ‘comprehensive, viable rectification plan’, to separate its payment tools and consumer credit products and restructure as a financial holding company under the same regulatory control as banks, which in China are state-owned except in very limited market segments.
The latest round of re-regulation is not a definitive crackdown on VIEs, monopolies or public listings on Shanghai’s STAR market. VIEs and STAR IPOs are a means of increasing the national technology base and not the main targets of re-regulation. After all, the largest monopolies, such as China Mobile and the Industrial and Commercial Bank of China are all state-owned.
Now that the homegrown Chinese industry has come of age and is globalising, the government is interested in enhancing state control and ordering sectoral developments in the business of the internet and finance. These value-added services operate on top of the state-owned information and financial infrastructures, which are critical for authoritarian resilience and China’s internationalisation. Liberal capital markets and industrial policy together underpin Chinese state capitalism. They are the deliberate means, not the ends, of an authoritarian state seeking domestic political consolidation and global ascendency.
*About the author: Roselyn Hsueh is Associate Professor of Political Science and co-program director of the Certificate in Political Economy at Temple University.
Source: this article was published by East Asia Forum