Oct 26, 2020 - Economy

The U.S.-China cold war is coming to financial markets

Illustration of a Chinese-style dragon casting an upward-trending shadow on a financial chart.

Illustration: Sarah Grillo/Axios

Ant Group's $34.5 billion IPO will make the Chinese fintech company the largest listing ever, and its choice to list its shares in Hong Kong and Shanghai rather than New York City marks a pivotal moment that could see the financial industry move towards China.

Why it matters: "This was the first time such a big listing, the largest in human history, was priced outside New York City," Ant Group founder Jack Ma told the Bund Summit in Shanghai Saturday. "We wouldn’t have dared to think about it five years, or even three years ago."

Driving the news: Ant Group will be valued at just under $314 billion, larger than some of the biggest banks in the U.S., including Goldman Sachs and Wells Fargo and just below the market cap of JPMorgan Chase, the largest U.S. bank.

  • And that's before the so-called greenshoe option for a 15% overallotment of shares that could make it worth more than even Industrial and Commercial Bank of China, the world’s biggest bank by assets, Reuters notes.

What's happening: As a result of the Trump administration's tech war and bipartisan hostility from Congress, more Chinese firms may eschew U.S. financial markets to avoid facing increasing regulations and scrutiny.

  • And thanks to a growing movement for market liberalization and a relaxation of China's government currency controls, they are having an easier time drawing investment and interest to listings on the mainland.
  • Opening China's financial markets is expected to be a top subject at the four-day plenum meeting of the Communist Party’s Central Committee this week.
  • China also is far ahead of the U.S. and the rest of the world in developing a central bank digital currency, and on Friday gave legal backing for a digital renminbi, which will more easily facilitate international transactions.

The big picture: The combination of a more free-trading currency (which has reached its strongest in two years versus the dollar), higher government bond yields and the presence of more of the world's largest and most influential companies is expected to draw considerable funds to China from international investors who currently have a minimal presence.

  • New IPOs on exchanges in Shanghai and Shenzhen reached $53 billion, 2.5 times the comparable figure in 2019, according to Deloitte.

What they're saying: The latest developments show "the rise and the increased importance of China's renminbi as a currency," Bridgewater Associates founder Ray Dalio said in an interview Monday with Yahoo Finance.

  • "More and more you're going to see the internationalization of the renminbi. You're going to see capital flows move in those directions."

What's next: A separate report from Deloitte notes that "stock exchanges in Shanghai, Hong Kong and Shenzhen will claim first, third and fifth positions in the global IPO ranking by total funds raised in the first nine months of 2020."

  • "Several other developments are set to sustain the prevailing trend of listings in the Chinese Mainland and Hong Kong over the rest of this year, and in the near to medium term."
  • Deloitte expects Hong Kong, Shanghai and Shenzhen to reach record fundraising levels this year with hundreds of new listings.

Don't sleep: The boost in IPOs follows the growth of mainland Chinese stocks in MSCI's emerging market and all-country world equity indexes and the inclusion of Chinese bonds in the Bloomberg Barclays bond aggregate and FTSE Russell's World Government Bond Index.

  • Such index inclusions already have spurred increased fund flows from foreign investors, including $66 billion in the third quarter.

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