Ant Group's botched IPO: The risk of investing in China

Earlier this week, the Ant Group IPO was suspended. It highlights an important risk of investing in China that investors need to know.

Ant Group’s massive initial public offering (IPO) was stopped cold in its tracks earlier this week.

Ant Group, a fintech company backed by Alibaba and its co-founder Jack Ma, was supposed to list its shares in the stock exchanges of Shanghai and Hong Kong today.

The IPO was slated to raise a mammoth sum of at least US$34 billion (S$45 billion) for the company. What happened instead was the Shanghai Stock Exchange suspending Ant Group’s listing on Tuesday, followed shortly by the same action from the Hong Kong Stock Exchange.

Ostensibly, Ant Group’s IPO process was stopped after Jack Ma gave a speech during a financial conference in Shanghai in late October.

In his comments, Ma had essentially labelled the Chinese financial system and regulations as antiquated. This presumably angered the Chinese government because Ma was quickly summoned for a meeting with the country’s financial regulators. And then came the news of the fintech firm’s stalled IPO.

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I see Ant Group’s predicament as a manifestation of the risk of investing in China that investors need to contend with. I’m often being asked about my opinions on investing in Chinese companies. I think there are wonderfully innovative companies in China with tremendous growth prospects that can make for excellent investment opportunities.

But will I want to make Chinese companies the majority of my portfolio? No. This is because I think that Chinese companies have to deal with unique political and regulatory risks that companies based in democratic environments do not. And these risks, if they flare up, could easily derail a Chinese company’s business.

A recent Bloomberg article on the Ant Group IPO-debacle contained the following passage:

“The consequences came this week. On Monday, Beijing’s top financial watchdogs summoned Ma and dressed him down. Beijing also issued draft rules on online micro lending, stipulating stricter capital requirements and operational rules for some of Ant Group Co.’s consumer credit businesses.”

Based on Bloomberg’s reporting, the Chinese government has effectively made it more difficult for Ant Group to grow. But what’s more important is that the Chinese government has appeared to also pull the plug on Ant Group’s IPO for now.

I just don’t see how something similar – where a company’s IPO process is killed at the very last minute because the company’s public-face had made some unflattering comments about its home country – can happen in a democratic environment.

This article is not meant to discuss the investment merits of Ant Group. Instead, it’s simply meant to highlight what I think is a critical risk of investing in China that investors need to know: Chinese companies face unique politically-related risks that are not to be trifled with. And Ant Group just happens to be a prominent example.

This article was first published in The Good Investors. Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I currently have no vested interest in Ant Financial or Alibaba. Holdings are subject to change at any time.