Ant Group cleared the last regulatory hurdle in launching the largest initial public offering in history when the China Securities Regulatory Commission last week gave the green light for its dual listing in Hong Kong and Shanghai. It was the fastest IPO approval in the mainland’s Nasdaq-style STAR market. The Alibaba affiliate, which owns China’s largest mobile payment platform Alipay, is expected to list on November 5, two days after the US presidential election.
But while investors salivate over the profits they could realize from the jumbo IPO – it is expected to raise about US$35 billion – attention should also be given to the rationale behind Beijing’s policy support for the fintech giant.
During a meeting on July 30, the Political Bureau of the Communist Party of China’s Central Committee agreed to form a new economic development pattern centred on "internal circulation” (内循环) and speed up a "dual circulation” (双循环) growth model for the country.
While most parts of the world are still reeling from the impact of the coronavirus pandemic, China has pressed ahead with the task of economic recovery. Its 4.9% GDP growth in the third quarter, as reported by the National Bureau of Statistics, has shown that the country remains the world’s key growth engine.
In the wake of Washington’s efforts to disconnect the country from the global supply chain, as evidenced by its continued sanctions on leading Chinese tech companies such as Huawei, China is bent on setting into motion a Plan B. As the second largest economy and the world’s factory, China has holistic supply chains covering upstream and downstream production facilities in most industries. Theoretically at least, it has the capability to complete the entire production and sales cycle internally.
This internal circulation, which seeks to bridge domestic supply and demand, has become even more urgent for China’s policy makers as other major economies such as the US and Europe are still struggling to contain Covid-19. As the largest exporting country, China is also exploring new opportunities within its shores, especially with regard to the new economy, to compensate for weaker external demand.
This year China has issued several policies to support its domestic capital market as well as the technology sector. In Shenzhen’s next five-year plan issued by the State Council on October 11, innovative measures such as registration-based IPOs on the ChiNext market and Chinese depository receipts are officially encouraged on a pilot basis. Shenzhen has also started testing a digital currency with its citizens.
While these policies and developments seem uncorrelated, the ultimate goal is to accelerate internal circulation by optimizing the use of China’s financial resources. Equity financing, an essential and effective direct funding channel, is likely to play a larger role in bringing liquidity to high-quality issuers.
Ant Group has allocated about 10 billion yuan (US$1.5 billion) worth of A-shares to five mutual funds including China Asset Management and China Universal Asset Management for the mainland tranche. The mutual funds have given China’s 148 million retail investors indirect access to Ant’s A-shares, which are exclusively sold on the Ant platform. This is the first time in China’s history that dedicated mutual funds are set up for subscribing to a tech IPO.
With China directing capital into the real economy and avoiding its circulation in the financial system and real estate sector, technology leaders such as Tencent and Alibaba stand to benefit from such capital market reform, which is what the regulators would like to see.
The Ant IPO highlights the important role played by Shanghai’s STAR market, which has lured Chinese technology companies such as artificial intelligence chipmaker Cambricon and semiconductor foundry SMIC. In return, the big tech firms are expected to zealously discharge their social responsibility, not just by creating more jobs, but also by allocating their capital more efficiently either through incubating new companies or investing in other real economy companies within their ecosystems.
In other words, with great power comes great responsibility. Leading technology companies that have enjoyed favourable policies will be the key players in China’s economic transition. In that sense, the Ant Group IPO is just the beginning of China’s dual circulation growth model.