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Construction Bank’s loud silence on spiked digibond

Does the eleventh-hour scrapping of CCB’s digital bond offering, following Ant’s scuttled IPO, suggest a pattern?

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The botched IPO of Ant Group couldn’t have been more visible. But the factors that made it such high drama could also argue for its being a singular event.

The dual IPO’s very size ($35 billion from Shanghai and Hong Kong bourses), its high profile (fueled by the pugnacious Jack Ma) and the backdrop of simmering tensions between China’s government and its biggest tech companies all point to the possibility that killing the deal at the last minute was a spectacular one-off by Beijing.

After all, China is still committed to widespread digital innovation, and upending Ant’s IPO sends a poor signal to homegrown innovators and the investors who risk backing them.

If this was meant to be an isolated event, though, the Ant debacle looks to have already caused collateral damage.

The innovative digibond

Last week, one hour before a listed bond was due to start trading at noon on November 13, its sponsor, China Construction Bank, pulled out.

This was a very innovative deal: to have listed a digital bond on a retail exchange that would trade worldwide, giving global investors access for very little money to a relatively high-yielding, U.S. dollar-denominated deposit from CCB.

This was a huge advance for digital assets, securities tokens, and fractionalization, making an institutional product available to the masses in a regulated environment (in Labuan, the offshore center of Malaysia), all based on Fusang Exchange’s blockchain technology.

Having the second-largest bank in the world by assets serve as sponsor was icing on the cake.

Keeping quiet

It’s taken a week for CCB to formally notify Fusang and Labuan authorities that it had decided to withdraw its listing. It has not given a reason, and CCB Labuan executives did not respond to DigFin’s inquiries.

Officially notified by CCB, Fusang then said on November 23 that it is returning investors’ funds. It is circumscribed in what else it can say, but the exchange is making the point that the last-minute cancellation was due to CCB’s internal decision-making.

“There were no legal, regulatory, operational, or technical issues,” said Fusang CEO Henry Chong.

He says the platform, deal structure and commercial model have been validated, describing both demand and media attention as far exceeding expectations. Fusang is in talks with other financial institutions to come up with similar transactions.

Is there a pattern?

DigFin can only speculate as to why CCB pulled out. The consequences may impact more than just one bank’s deal or one digital exchange’s ambition.

The timing, on the heels of Ant’s scotched deal, suggests a thorough rethinking of fintech in mainland China. If so, then the Ant fiasco was not an isolated event.

Why might this be the case? Well, CCB was the sponsor of the Longbond and the proceeds would have gone into its central treasury operations. The idea had been to raise a sizeable $3 billion, which suggests the bank had big ambitions – it can’t have considered this a quiet little proof-of-concept.

Last week, CCB executives had indeed expressed their enthusiasm to DigFin about the potential for this listing to be a transformative event.

It’s possible that the large investor demand and media attention spooked some senior executives in Beijing.

Perhaps the internal communication was poor – although CCB Labuan is a tier-1 branch, meaning it is governed as part of the bank’s senior offices.

Maybe someone didn’t like the idea of Bitcoin being involved: CCB would only operate in dollars, but Fusang could accept bitcoins and convert them into dollars invested in the security.

This is daring for a bank. CCB would have to trust Fusang’s KYC processes, which are regulated, but by an offshore center; Labuan isn’t Hong Kong or Switzerland. Even so, these features were baked into the deal and well documented.

The most likely explanation is that CCB (and Fusang) misread the mood in China in the aftermath of the Ant debacle. They saw it as a unique event triggered by Jack Ma’s aggressive criticism of his regulators.

Instead, what happened to Ant now looks like a wholesale political campaign to reel in fintech – and big state-owned banks’ tech-related projects are not exempt.

Private tech companies can still realize their dreams. Lufax, for example, successfully listed on Nasdaq, raising $2.36 billion on October 30.

Its path was not smooth: Lufax had to spend years extricating itself from its original peer-to-peer lending business, after the government decided to crack down on the sector.

Perhaps Lufax was lucky to get the deal done before Ant’s IPO; or perhaps it’s too small a business to be considered systematically risky.

Lufax is a reminder that China is a big, diverse place and we should not over-interpret every event. Indeed, some people in China might wonder why there should be any fuss over the CCB/Fusang affair. This sort of unpredictable business practice is common at home.

It is not common abroad, however. CCB is part of “China Inc.” The fallout of the failed CCB Longbond will haunt Chinese institutions operating overseas. Counterparties will insist on a China premium.

Meanwhile the prestige of supporting a large, innovative digital-security issuance will go to someone else.


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Construction Bank's loud silence on spiked digibond