Over the past three months China’s capital markets, although not particularly volatile, have had to respond to a slew of contradictory signals.  By far the most prominent - and worrying – concern is Ant Group, the financial services arm of e-commerce titan Alibaba. After weeks of speculation as to his whereabouts, last week’s minute-long pre-recorded message from Alibaba founder Jack Ma prompted a 8.5% jump in the firm’s stock in Hong Kong.

But how much can be read into the message is hard to say. Ma had not been seen since he criticised Chinese regulators at a financial forum in Shanghai on October 24. Ten days later the authorities cancelled Ant’s planned stock market debut, reportedly on the orders of Xi Jinping. At $37bn, it would have been the world’s largest IPO. 

For now at least, Ma has been spared the treatment meted out to oligarch Xiao Jianhua, who has been held incommunicado for nearly four years since he was grabbed from his Hong Kong hotel suite and abducted to the mainland. 

But Ant remains firmly in Beijing’s crosshairs.  It is becoming increasingly clear that Ant will be required to spin off its lending business and significantly increase its capital, making it look more like a banking institution. 

But that’s not all. In an unusual move for any central bank, the People’s Bank of China (PBoC) has served notice that regulators are now targeting Ant’s Alipay payments service as a monopoly that might have to be broken up. The same goes for internet giant’s WeChat Pay, the country’s No. 2 payments provider after Alipay. 

For those who see Ant’s IPO cancellation and the threatened dismantling of the group as proof positive of Xi’s animus against the private sector, there is plenty to feast on.  None of the actions is encouraging and the primacy of politics and loyalty to the Chinese Communist Party (CCP) when it comes to economic development is plain to see.

The Global Wall of Money Getting Access to China

At the same time, the Ant Group drama is incidental to the broader trends playing out in the Chinese equities markets.  Of course, Alibaba, as a proxy for Jack Ma and Ant, has suffered since the IPO was called off. It is currently down around 12%. Yet the CSI300 index tracking the top 300 companies listed domestically is up 13% over the same period; the ChiNext index, which tracks private and new-economy stocks listed in Shenzhen is up over 28%.  

The ChiNext rallied over 65% in 2020, following a 44% rise in 2019, and is already up 11% this year.  It is still 17.6% below the all-time highs scaled in 2015, but that bubble was inflated by far higher levels of leverage. Moreover, the surge then was far more aggressive than the current one.  The assumption has to be that new highs will be reached before this rally fades.

Ant’s troubles have failed to deter foreign investors. 

Since the IPO cancellation, net inflows into equities via the Shanghai and Shenzhen Connect channels have exceeded Rmb150bn (Rmb92bn for Shanghai, Rmb64bn for Shenzhen). 

Moreover, a further 45 foreign institutions were registered under the Qualified Foreign Institutional Investor (QFII) scheme in November and December, compared with 27 in the first 10 months of 2020. 

Recall that in late October the China Securities Regulatory Commission overhauled the rules of the portfolio investment programme to allow access to virtually all classes of foreign institutions. The regulator also scrapped its cumbersome quota approval process and dramatically expanded the range of financial instruments that QFII investors could purchase. 

The significance of these changes should not be underestimated.  When QFII was launched in late 2002, would-be investors faced a long, tortuous process to win approval. Occasional minor relaxations in the strict, cumbersome rules limiting market access were celebrated as triumphs. 

Fast forward nearly 20 years and, put simply, the access problem is solved: Chinese markets are open to foreign institutional investors of all stripes, including hedge funds not just traditional asset managers. 

That is not to say that the underlying problems of China’s stock markets have been solved. They are still dogged by fraud, poor disclosure, insider dealing and connected party transactions.  Navigating this hostile environment is now the primary concern of investors, not whether they can actually invest or not.

The access rules have been simplified despite the Great Decoupling between the US and China that is unfolding and the trade war that the Trump administration has waged against Beijing. Capital market restrictions have been eased across the board even as pressure has mounted on many foreign firms doing business in or with China. 

Indeed, the rush to invest in China has continued despite Trump’s ban on US investors buying selected Chinese stocks - a move that led to those names being excluded from some equity indexes, which then had to be reweighted. 

The bottom line of late is the old story that nothing attracts money like a rising stock market.  Alleged crimes against humanity, sanctions, geopolitical tensions, a clampdown on the private sector are problems for later. In a world awash in liquidity and with China open to inflows, there is a wall of money looking to gain access. 

As long as China keeps the lid on new outbreaks of Covid-19, there looks to be no immediate trigger for a market reversal.

Making Sense of Ant

How then to make sense of these conflicting signals?  China’s economic policy mix has always been full of contradictions. The juxtaposition of opening up to foreigners while reining in private business is just the latest. Yes, it marks a change from years gone by, and yes, it reflects Xi’s demand that companies pay greater heed to political loyalty. It will ultimately result in greater inefficiencies and capital misallocation, but China’s leaders have shown repeatedly that they value efficacy more than efficiency.  A closed capital account and control of key sectors of the economy allow them to delay the inevitable consequences of their policy choices.

In the case of Ant, while Jack Ma, the company’s management and many of the sector’s cheerleaders are crying foul, they have failed to appreciate how the political winds have changed in China. Like most tech companies, managers at Ant love to play regulatory arbitrage as they use their financial clout and duopoly/monopoly positions to squeeze existing markets and companies in the name of innovation while evading the regulatory costs.  

The PBoC has shown that such games will no longer work in China. Frankly, you can’t blame the PBoC. 

China’s banking sector, broadly defined, is about three times the country’s GDP so it should be no surprise that the authorities, having just got a handle on the shadow banking industry, are concerned about fintech companies that are outside the scope of any financial regulation.

None of this is really news. The prospect of a much tougher regulatory environment for Ant and other fintech companies didn’t just appear out of thin air in response to Jack Ma’s unwelcome speech in Shanghai. Investors may look back one day and thank Beijing for cancelling a deal which was a last-ditch attempt to sell a business at an unsustainable price based on a regulatory environment which was soon to change beyond recognition.

If there is a lesson to be learnt from the past few months, it is that China is going to run its financial markets the way it wants to.  

Conclusion

The CCP is aggressively looking to extend its reach into all areas of the economy; it wants to enforce its writ in both the private and public sectors.  Greater openness towards foreign portfolio inflows will be on China’s terms.  If Jack Ma, with all his connections and success, can’t read the political tea leaves, then foreign investors must be more cautious than ever.  

The market trading and clearing processes will continue to operate as efficiently as they ever have, but no investor can afford to ignore the long arm of the Party stretching into their favourite company.  Soon after he came to power, Xi Jinping promised in 2013 that the market was going to play a decisive role in the economy.  He lied.