This is a story about risk.
China’s economy is the second largest in the world and is a distant second to the US with a Gross Domestic Product (GDP) of $14.3 trillion. The US GDP, by comparison, is $21.4 trillion. The per capita GDP or GDP per citizen is $10,262 versus $65,298 for the US. Think of Gross Domestic Product as the value of all goods and services produced by a country.
Alibaba is the Chinese equivalent of Amazon in the US. It was created by a Chinese entrepreneur named Jack Ma. Ma is a brilliant man who has had many financial successes. Alibaba was growing so fast that it needed a method for its customers to securely pay for the goods and services that were purchased on Alibaba. Jack Ma and Alibaba formed Alipay. It is the same reason eBay purchased PayPal. It allowed customers of eBay to securely pay for goods and services on eBay.
Alipay turned into Ant Financial. Ant become so popular in China as a digital payment method that some of its users started to rely on it for banking. It has over 1 billion users. Ant formed a Money Market fund to house the large amount of funds that users were keeping in their account. It even formed a low-risk mutual fund. That is when the trouble began. Ant became so popular as a financial tool that it began to siphon off customers from Chinese banks. This garnered the attention of the Bank of China as well as the Chinese government.
Ant planned an Initial Public Offering (IPO) for November 4, 2020. By all accounts, it was to be the largest IPO ever. The estimate of the Ant IPO was around $35 billion dollars. Recall that the entire annual GDP of China is $14.3 trillion.
Two days before the IPO the Chinese government “suspended “the IPO over antitrust concerns. Many believe Chinese President Xi was directly responsible for the decision. This act shocked financiers around the globe.
China is often compared to the US economy. Nothing could be further from the truth. China is still an emerging market economy. There are a large number of Chinese citizens still cooking over open flames. China is a communist country and businesses headquartered there do not have the freedoms that that businesses in the US do as evidenced by the story of Ant. In one fell swoop, $35 billion dollars of cash flow was eliminated. Alibaba stock has lost significant value since the ANT IPO was scuttled.
AP Wealth Management recommends exposure to China, but we currently favor US investments over China and other countries. Frequently, our role is to measure risk for our clients. There is risk in every investment. The story of Ant is one of the of the ways we dig deep to measure risk and keep our clients informed.
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