The world was an entirely different place for Jack Ma nine months ago. Ant Group, a fintech company owned by his retail giant, Alibaba, was all set for a $34.4 billion initial public offering, the world’s biggest. It had got $3 trillion worth of bids from individual investors across its dual listing in Hong Kong and Shanghai. The bidding for the IPO was so aggressive that the servers of some brokerage platforms in Hong Kong reportedly crashed owing to the overwhelming number of orders.
Ant Group’s shares were expected to trade in Hong Kong and Shanghai on November 5, 2020. But it never happened. On November 3, Chinese regulators summoned Ma and told him that Ant’s days of relaxed government oversight were over; they later shut down the IPO saying there were shortcomings in the process. The Wall Street Journal reported that Chinese President Xi Jinping had personally halted the IPO because an outspoken Ma had irked the government. Though he was the poster boy of Chinese entrepreneurship, Ma always had an uneasy relationship with the government, as he seldom hesitated to criticise its policies. He was rarely seen in public after the botched IPO.
While it looked like Ma had brought it upon himself by antagonising the government, it soon became clear that he was just a scapegoat. The Communist Party of China’s policy shift was what killed Ant’s IPO. In what is said to be the biggest ideological shift in the past 40 years (since Deng Xiaoping set economic development as the socialist country’s ultimate priority in the second stage of reforms in the late 1980s), the authorities started cracking down on developers, crypto miners, tech companies, health care providers and tutoring firms. All targets got hit with radical rule changes or aggressive regulation in the past nine months. China’s uber-rich lost $30 billion in the carnage in the markets between November 2020 and July 2021. And it was not Jack Ma, but his main competitor, Tencent Holdings Ltd’s boss Pony Ma, who lost the most. Pony, who strenuously avoids the limelight, lost $14 billion.
Many analysts see it as the end of the four-decade-long free run of the market economy in China and the beginning of a new era wherein the government has put the ruling party’s core ideology before the interests of corporations and shareholders. “A new era that prioritises fairness over efficiency has begun,” said Alan Song, founder of Beijing-based private equity firm Harvest Capital.
As much as it is an ideological whim, this shift was a response to the growing discontent among the Chinese middle class over exorbitant costs of housing, education and medical care. The reforms are seen as being beneficial to the masses at the expense of rich businesses. “These policies were announced to reflect the party’s progressiveness,” said Zhaopeng Xing, senior China strategist at ANZ, to Reuters. “They send a message that China is not a capitalist country, but it embraces socialism.”
But they have raised questions about the future of Chinese companies’ engagement with foreign capital markets and foreign investment. According to the US-China Economic and Security Review Commission, there are 248 Chinese companies listed on three major US exchanges, with a total market capitalisation of $2.1 trillion. In 2020 alone, 29 Chinese companies debuted on the US exchanges. Some 60 more were planning to do it this year, according to the New York Stock Exchange. Many of them, however, are unlikely to materialise as Chinese regulators have announced that they would tighten rules for companies seeking to list or sell shares outside the country.
The Chinese technology companies listed in the US are facing regulatory challenges there as well. The Holding Foreign Companies Accountable Act, signed into law by President Donald Trump in December 2020, is aimed at removing companies from US exchanges if they do not comply with American auditing standards for three years in a row. The rules also require firms to prove to the Securities and Exchange Commission, the US market regulator, that they are not owned or controlled by a foreign government. Many of the dual-listed Chinese tech companies have filed secondary offerings only in Hong Kong, which could be an indication that they are unlikely to comply with new US audits.
Dream start: Food aggregator Zomato had a spectacular IPO in July | Reuters
American investors, too, seem concerned. Chinese ride aggregator Didi’s New York Stock Exchange debut in June was the second-largest among Chinese companies, after Alibaba’s IPO in 2014. However, On July 4, the Cyberspace Administration of China ordered app stores to remove Didi, after flagging violations about the company’s collection and usage of personal information. Its stock lost about half its value. The Invesco Golden Dragon China ETF (PGJ), which tracks US-listed Chinese shares consisting of ADRs of Chinese companies, has lost a third of its value from its February peak. ADR, or American depositary receipt, is a way for American investors to buy stakes in foreign companies.
The developments could be a great opportunity for India, not just because global investors have already started looking for markets with stable policies, but also because many Indian startups seem ready to take it to the next level. After food aggregator Zomato’s spectacular IPO last month, e-tailer Flipkart, payments company Paytm, insurance aggregator Policybazaar, logistics company Delhivery and cosmetics retailer Nykaa are planning public offerings.
Some of them are looking at an overseas listing. Flipkart and grocery seller Grofers are said to have explored a listing in the US through a special purpose acquisition company (SPAC). A SPAC is a company formed to raise capital through an IPO for acquiring an existing company. ReNew Power, India’s largest renewable energy company, is all set for a merger with a Nasdaq-listed SPAC at an enterprise value of about $8 billion. The new entity, ReNew Energy Global Plc, will be listed on the Nasdaq.
“India will benefit from the Chinese crackdown on its tech startups, as people may become fearful of investing in China,” said Mohandas Pai, chairman of Aarin Capital and Manipal Global Education. It might have already started. The data compiled by research firm Preqin says the total value of venture deals in India in July ($7.9 billion) was higher than in China ($4.8 billion), a first in eight years.
The real deal, however, will be in foreign direct investment. Thanks to the stupendous economic growth in the past few decades and rising wages, China is now an upper-middle-income country. That means manufacturing in China does not give as much of a cost advantage as before. In fact, many manufacturing companies have already shifted their operations to countries with lower labour costs. India’s per capita income is just about a fifth of China’s and it stands a good opportunity to attract at least a part of these investments. “The government should form marketing teams with state governments to market India to the world’s manufacturing companies,” said Pai. “We should talk to global manufacturers who are already here and incentivise them. The production-linked incentive scheme is a great start.”
According to the World Investment Report 2021 by the UN Conference on Trade and Development, India was the fifth-largest recipient of FDI inflows in 2020. It received $64 billion, while China got $149 billion.
It will take a while for India to match China’s manufacturing prowess, but what will work to its advantage (other than the cost factor) is the changing dynamics of global politics. Xi’s China is on a collision course with the US, as the communist nation no longer hides its ambition to become the world’s dominant power. While the two countries’economic interests have so far been only marginally affected by their political differences (they are still among the world’s largest trading partners), that is likely to change. And that will be India’s biggest opportunity to make it big.
—with Abhinav Singh