Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: a stalled IPO bodes poorly for China’s tech industry, Ackman’s Big Short 2.0, a bleak economic outlook for Germany, and a look at the history of innovation in China.
Just a few weeks ago, Jack Ma, the billionaire founder of Chinese ecommerce giant Alibaba, was set to score another victory with the $35 billion initial public offering (IPO) of Ant Group, the fintech firm spun off from Alibaba in 2010.
Then he ran afoul of the Party after publicly criticizing regulators for stifling innovation in China’s financial system. Ma likened Chinese lenders, which require sizable collateral and guarantees from their borrowers, to “pawn shops.” He argued that domestic and global regulators overemphasize systemic risk at the expense of development: “China’s financial system basically has no risk, it is systemically lacking in risk.”
Chinese authorities promptly halted the Ant IPO before summoning Ma to a meeting with financial regulators. The People’s Bank of China followed up this week with new capital rules for microlenders, cutting Ant’s $280 billion valuation in half. Ant’s consumer-lending businesses connects borrowers with creditors, so the company puts up little-to-no capital. It will now have to provide 30 percent of the capital for loans provided through banks, as opposed to 2 percent previously, and loans to individuals cannot exceed 300,000 yuan (roughly $45,000).
While Ma’s criticisms were certainly unwelcome, they likely served as a pretext for Chinese regulators to kneecap one of the country’s most celebrated entrepreneurs, whose wealth they see as a threat to the Party’s power. And it appears to be working: Alibaba and Tencent, the two biggest Chinese tech firms, saw nearly $300 billion in collective value evaporate this week following the new regulations. Ma alone lost north of $3 billion in wealth.
The sell-off hints at the extent to which overzealous regulation will undermine faith in the Chinese economy in the foreseeable future. For years, the CCP has listed financial liberalization among its priorities. The gradual liberalization of Chinese foreign-exchange and bond markets, as well as the country’s inclusion in major stock indexes, attracted unprecedented amounts of foreign capital this year.
But just as Beijing was poised for what Axios called “a pivotal moment that could see the financial industry move towards China,” regulators took the punch bowl. If they hadn’t already, foreign investors will now have to think twice before entering the country’s financial markets. The botched Ant IPO also raises questions as to Beijing’s ability to foster “indigenous innovation” in emerging technologies, a central goal of the CCP’s Made in China 2025 plan.
Worse, regulators are exacerbating one of the country’s major macroeconomic weaknesses. Chinese households have long saved inordinate amounts of money, holding back domestic consumption. The CCP has spent years emphasizing the need to develop its local market in order to wean the country off exports. Cutting off the flow of credit to consumers will not help.
Around the Web
Despite positive results from Pfizer’s COVID-19 vaccine trial, hedge-fund manager Bill Ackman is bearish on corporate credit. The man who made a spectacular bet against the bond market just before lockdowns hit the U.S. has put on another big short: “He said the new hedge is close to 30 per cent the size of the bet he placed in late February, when he bought a set of huge insurance policies linked to $71bn of corporate debt.”
Germany, once praised for its handling of the pandemic, faces a bleak economic outlook: “ZEW’s gauge of expectations dropped for a second month in November. The reading of 39.0 is the weakest since April, when the first wave of the pandemic ravaged Europe’s largest economy.”
Vox’s Dylan Matthews explains a Democratic strategist’s theory on polling errors:
The theory is that the kind of people who answer polls are systematically different from the kind of people who refuse to answer polls — and that this has recently begun biasing the polls in a systematic way.
This challenges a core premise of polling, which is that you can use the responses of poll takers to infer the views of the population at large — and that if there are differences between poll takers and non-poll takers, they can be statistically “controlled” for by weighting according to race, education, gender, and so forth.
In light of China’s Big Tech crackdown, today we’ll look at a two-decade-old Harvard Business Review story highlighting the barriers to innovation in China:
Consider how those forces can constrain the entrepreneurial creativity bubbling up in China. In the early 1990s Edward Tian (Tian Suning), a U.S.-educated entrepreneur, founded the telecom start-up AsiaInfo (now AsiaInfo-Linkage), which within three years grew into a thriving company of 320 people with revenue of $45 million.
In 1996, frustrated with the slow pace of technological change in China’s telecommunications industry, then–vice premier Zhu Rongji convinced Tian that it was his duty to leave AsiaInfo in order to lead a new company, China Netcom, as it set out to build a fiber-optic network linking some 300 cities. When one of us (McFarlan) visited the company, in 2001, it was an innovative firm with an open, creative culture, despite the fact that it was jointly owned by four government agencies.
In 2002, when the telecommunications giant China Telecom was broken apart by the government, its 10 northern provincial markets were integrated into China Netcom. Overnight, Tian became responsible for an organization of 230,000.
The culture clash between the two organizations was extraordinary. Tian was seen by many China Telecom employees as an American outsider trying to reform a state-owned enterprise in unacceptable ways. Six months after the merger, McFarlan presented our case study on China Netcom to 70 senior Chinese executives, including 20 from the telecom industry. Rather than draw lessons from the case about the relationship between organizational change and business success, the group attacked Tian for his “un-Chinese” ways of managing—and then charged McFarlan with incompetence for presenting Silicon Valley culture in China in such a positive light. Tian soon stepped down from his CEO role and later from the China Netcom board.
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