China's move to abruptly halt the world's biggest stock market debut sends global investors a clear message: Any financial opening will only be done on terms that benefit President Xi Jinping and the Communist Party.
Policymakers in Beijing shocked the investment world Tuesday by suspending an initial public offering by Ant Group, a financial technology company owned by billionaire Jack Ma — China's second-richest man. The decision came just two days before shares were set to trade in a listing that attracted at least $3 trillion of orders from individual investors.
The timing of the decision showed once again that for Mr. Xi and the party, financial and political stability take precedence over ceding control of the economy — especially to a private company. In Beijing's view, allowing the IPO to go forward could effectively give Ant too much sway over the financial system, posing broader risks that could ultimately undermine the party's grip on power.
"The party is flexing its muscle," said Victor Shih, associate professor at the University of California, San Diego and author of "Factions and Finance in China: Elite Conflict and Inflation." "It's saying to Jack Ma, you are going to have the biggest IPO in the world, but that's not a big deal for the CCP, which oversees the world's second-largest economy."
While the party has ample tools to quash political dissidents, local officials have struggled at times to contain outbursts of anger brought on by bread-and-butter issues such as labor disputes, investment fraud and environmental disasters. To mitigate any threats to the financial system or the party's authority, Mr. Xi's government has demonstrated over the past decade that it has no problem taking down billionaires and private companies.
For foreign investors, the Ant saga has raised questions about the viability of Hong Kong and Shanghai as premium financial centers. That's particularly so after China last week signaled greater openness in a new five-year plan that put a timeline on moving forward with past promises of allowing greater foreign access and gradually relaxing controls over the yuan and capital flows.
Both the sequence and timing of events of the IPO failure will raise doubts among foreign investors about China's commitment to the kind of transparency needed in modern, open capital markets, said Fraser Howie, author of "Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise."
"It sends a number of signals, often conflicting," Mr. Howie said. "Investors must therefore be concerned about the listing process in China, they will be concerned by disclosure, they will be concerned about arbitrary moves on the part of the regulators."
Many analysts saw the move as sensible, even if the timing was disruptive. Chinese regulators said Ant's business model effectively allowed it to charge higher fees for transactions while state-run banks took on most of the risk. At the same time Ant sought to list, authorities were racing to develop rules that would subject financial holding companies to higher capital requirements. It's also planning to create a digital yuan, which is part of its push to maintain control over the stability of its payment system.