Alibaba Collides with China Geopolitics
Shares of Alibaba have fallen by almost a third since various regulatory agencies in China halted the Ant Group IPO and initiated an antitrust investigation into Alibaba. Alibaba’s stock price is now trading around where it was before the COVID-19 pandemic began.
The prevailing media narrative in the English press around the Chinese government’s moves against Alibaba is a mash-up of two tropes:
- Authoritarian Emperor Xi forcing entrepreneur Jack Ma to fall in line.
- The Chinese Communist Party stifling private enterprise to maintain its grip over political power in the country.
The underlying reality, as always, is not nearly so black and white. As Rui Ma at TechBuzzChina noted last week, antitrust regulatory discussions regarding China’s entire tech ecosystem in China (and especially enforcing rules already on the book) have been evolving for literally years. As Kevin Xu noted in his blog Interconnected, Jack Ma, who is supposed to have started this whole controversy by making an angry speech in November, called for more regulations in that same speech!
What does a geopolitical perspective offer in helping to understand what is next for Alibaba, for China’s tech ecosystem, and for China in general?
Since coming to power, Xi has not been a particularly subtle ruler. He began by purging the party of potential rivals and attacking the corruption that years of preternatural growth had allowed to fester. Xi has already achieved this, in our view. He is the strongest Chinese leader certainly since Deng Xiaoping, and he may be viewed in history as the strongest leader in modern Chinese history when all is said and done.
Xi’s first goals in power were about securing his position. But Xi cannot achieve his next set of goals for China simply by dint of personality. He needs the Party and the government to be on the same page, and on his page in particular. China is a massive country with over a billion people. If Xi has to make individual regulatory decisions, China will fail. What Xi really needs is a system that reinforces his priorities in every decision it takes – a system that Xi, the Chinese people, and foreign investors view as reliable.
So what are Xi’s goals? Again, Xi’s government has telegraphed them. A more equitable distribution of wealth. Improving environmental conditions. Eliminating poverty. Stimulating domestic consumption and moving up the manufacturing value chain. “L-shaped” economic growth determined by market conditions rather than /-shaped growth set by political necessity. This is not the place to recount all of Xi’s dream – it is simply to point out Xi has thus far been a man of his word, and that under his leadership, the Chinese Communist Party has been too.
The Chinese government has even been transparent about what it is asking Ant Group in particular to do: “Return to its roots in payments and bring more transparency to transactions; obtain the necessary licenses for its credit businesses and protect user data privacy; establish a financial holding company and ensure it holds sufficient capital; revamp its credit, insurance, wealth management, and other financial businesses according to the law; and step up compliance for its securities business.”
And Ant Group has already confirmed that it will do it.
That doesn’t sound like the Chinese government is about to break-up or destroy Alibaba to us. Besides, Xi can no more destroy Alibaba than a U.S. president can destroy Amazon or Facebook. The Alibaba story is not unique to China. Governments around the world are struggling with how to regulate the tech companies that are becoming the oil, steel, and railroad robber barons of the 21st century. The EU is even trying to create a tech giant and regulate it at the same time!
In the U.S., because the rule of law is well-established, antitrust investigations into Facebook, Google, and others barely register in the stock price. In China, where the regulation is transparent and government priorities are clear but where rule of law is uncertain, a regulatory decision sets off a market panic.
There is plenty of good reason for skepticism when it comes to Alibaba and China’s other tech giants. What is best in the short-term for these Chinese companies is not necessarily in lock-step with what the Chinese government thinks is best for China. We warned back in July that it was weird that Huawei, Alibaba, Tencent, and other major Chinese tech companies failed to send a representative to hear Xi pontificate about the importance of focusing on the domestic economy.
There is also plenty of good reason to be skeptical of the long-term thesis on China. Xi’s goals for China are clear enough, but achieving those goals will be difficult and the economic disruption that will come may very well erode the powerbase of the Chinese Communist Party. We think China will overcome these obstacles and emerge stronger for it, but we are under no illusions that this is a certainty. We can make the opposite case with just as much aplomb.
What there is no good reason to do is assume that Alibaba is being cut down to size because Xi is mad at Jack Ma. It would also be wrong to assume that China is retreating inward or going full-on Cultural Revolution 2.0. The Chinese government is regulating a monopoly and imposing more stringent regulations for a fintech company whose practices, if left unchecked, might have posed a systemic risk. Communism is in the eye of the beholder, and to our eyes, this isn’t communism. It’s state-led capitalism to a T. A bird with clipped wings still flies.
We believe nothing has happened in the last 2 months regarding Alibaba to alter whatever your current investment thesis is. If you are bullish on Alibaba, that means you are bullish on China, in which case, merry merry X-mas to you! If you are bearish on Alibaba for some of the understandable concerns about China in general that we alluded to above, you were expecting something like this anyway. All things being equal, we think the bullish case is more compelling, but there is no denying that the uncertainty and risk factors here are very high.
Whatever you do, don’t panic, and be skeptical of what you read in English-language media. (Even us.)