64 Finance & economics The EconomistNovember 7th 2020
21tions after the financial crisis, such as the
introduction of the supplemental leverage
ratio, which measures the total size of bank
assets relative to the amount of capital they
hold. The rule is “not very friendly to low-
risk activities, which include buying Trea-
suries,” says Pat Parkinson of the Bank Poli-
cy Institute, a lobby group.
In the spring the Fed eased pressures by
buying Treasuries from market partici-
pants struggling to sell them to intermedi-
aries. To encourage dealer activity it also al-
lowed banks to exclude reserves held with
the Fed and Treasuries from their leverage
ratios. That marked the Fed’s second inter-
vention in a year. In September 2019 it
eased the pressure on dealers after repo
rates—the price paid to swap a Treasury
overnight for cash, a key funding market
for Treasuries—spiked to over 10%.
Such strains may become more appar-
ent over time. Whatever the scale of stimu-
lus enacted next year, the bond market will
swell further. The Congressional Budget
Office expects federal debt to be worth over
$120trn in 2050, or 195% ofgdp. The result
is that “in ten or 15 years only half as big a
shock as covid-19...would cause the same
degree of Treasury-market dysfunction,”
noted Darrell Duffie of Stanford University,
at the Fed’s conference. “And after that, yet
smaller and smaller shocks would be
enough to choke dealer balance-sheets
with demands for liquidity.”
To ward off such a scenario, academics
and market participants are considering
how to revamp the system. The main prin-
ciple involves expanding intermediation
capacity. That could be done in many ways.
Restrictions that curtail intermediation
could be loosened; or the roster of primary
dealers could be expanded, to include
more banks and non-bank institutions.
Other solutions are more radical. In-
stead of trading through brokers, as they do
today, market participants could trade di-
rectly with each other. At present counter-
party risk deters direct trades; a central
clearing-house—a solution proposed by
Mr Duffie—could change that. With such a
set-up in place, the market might not have
seized up earlier in the year. “We were actu-
ally in a position to be a liquidity provider,”
Sarah Devereux of Vanguard, a giant asset
manager, said in September. “It was hard to
sell bonds, but it was also difficult to buy
bonds, for example, off-the-run Treasuries,
when they got to very attractive levels.”
The Fed could also make some of its in-
terventions permanent. William Dudley, a
former Fed official, favours a “standing
repo” facility, which would allow holders
of Treasuries to swap them for cash at any
time, reducing the likelihood of a panic.
Whatever the solution, the bond market’s
importance is such that it would be wel-
comed not only by America’s lawmakers,
but by the world’s investors too. 7J
ack ma wasin a triumphant mood short-
ly after Ant Group, his Chinese fintech
firm, priced its initial public offering—set
to be the world’s biggest ever, with almost
$40bn worth of shares sold. Speaking at a
summit in Shanghai on October 24th, he
chided regulators for being too focused on
preventing financial risks. Red tape, he
said, only held up innovation. Ten days lat-
er his words came back to haunt him. Less
than 48 hours before its stock was to begin
trading in Hong Kong and Shanghai, Ant
was forced by Chinese regulators to halt the
flotation.
The group said in a regulatory notice to
the Hong Kong exchange that the ipo,
scheduled for November 5th, had been sus-
pended because the company “may not
meet listing qualifications or disclosure re-
quirements”, after the regulator conducted
an interview with Mr Ma and other execu-
tives. The filings also mentioned “recent
changes in the fintech regulatory environ-
ment”, hinting that newly published rules
may have got in the way. The sudden sus-
pension also suggests that some powerful
officials may be displeased with Mr Ma, a
self-made man who, by the conservative
standards of big business in China, has an
outspoken streak.
Yet the turn of events is not just painful
for Ant. It reflects poorly on China’s regula-
tors. ipos are rarely stopped at such a late
stage. The deal was more than 800 times
oversubscribed in Shanghai, and in HongKong last week the firm closed its book a
day early. It was set to float in Shanghai on
the star market, China’s answer to Nas-
daq, designed to lure home Chinese tech
groups that have listed abroad. Instead, the
last-minute halt of Ant’s listing highlights
the opacity of the Chinese political system
and the risks that can trip up even its most
successful companies.
It is also easily the most public, and
most disruptive, of Ant’s run-ins with regu-
lators. The company has consistently ad-
justed its business as the rules around it
have shifted. The ipodebacle appears to be
partly related to one such case. Back in 2018
officials placed caps on asset-backed se-
curitisation, upending Ant’s model of sell-
ing its loans on to banks. So it pioneered a
new approach: consumers and merchants
borrowed through Alipay, its payments
service, on their smartphones, but the
money came from banks. Ant was simply
the conduit, collecting a “technology-ser-
vice fee”. This conduit business boomed,
with credit growing to outstrip payments
as Ant’s biggest source of revenue.
On November 2nd the Chinese central
bank and banking regulator published new
draft rules for online micro-lending, which
looked almost perfectly tailored to under-
cut Ant. Online lenders will need to fund at
least 30% of any loan they supply jointly
with banks. That could force Ant to keep
much more of the credit that it originates
on its books; currently, 98% is held as as-
sets by other firms, off Ant’s balance-sheet.
Additional disclosure requirements could
also make it much more cumbersome for
banks to partner with the group. Officials at
China’s banking regulator have already
pressed commercial lenders to adhere to
the new rules, according to Bloomberg, in
effect making many of Ant’s transactions
non-compliant.
Depending on how the rules are imple-
mented—they will not be finalised until
December—Ant’s capital-light model could
end up looking much less sleek. “It will be
valued more like a financial firm than a
tech firm,” said a strategist with an Asian
sovereign-wealth fund. Given Ant’s track
record, it seems a fair bet that it will quickly
adapt to the new rules, but its credit opera-
tions are likely to face much slower growth
and lower profitability.
Investors had previously given Ant a
forward price-to-earnings multiple of 40,
in line with big global payments compa-
nies. Most Chinese banks, in contrast,
trade on multiples of less than ten. Ant had
been on track for a market capitalisation
north of $300bn, higher than any bank in
the world. Now it is likely to fall well short
of that. Shares in Alibaba, a Chinese e-com-
merce giant that owns a third of Ant, tum-
bled by 8% after the suspension of the list-
ing was announced.
Some investors may at least be gratefulHONG KONG AND SHANGHAI
The world’s biggest ipois now the
world’s biggest suspended ipoRegulators v Ant GroupAnt agonises