The fate of entrepreneur Jack Ma is a salutary reminder of the realities of commercial life in China and the risks posed by provoking the state.
Ma started his e-commerce company Alibaba in 1999. It became the dominant Chinese e-commerce firm and expanded into other areas, including artificial intelligence, cloud software and filmmaking, while affiliate Ant Group controls Alipay, the world’s leading mobile payments platform.
As his empire flourished, Ma became a global celebrity. But last October, Ma overreached, likening state-run banks to pawnshops and branding financial regulators “an old people’s club”.
The following week, the Shanghai Stock Exchange cancelled Ant’s $37bn initial public offering – which would have been the world’s biggest. In December, the State Administration for Market Regulation started investigating Alibaba over alleged monopolistic practices.
Ma then disappeared from public view, prompting rumours he had been detained by the authorities. After a three-month absence, he posted an online video in January, pledging he and his colleagues would devote themselves to “education and public welfare”.
Tighter regulation of technology companies is a global trend. Chinese firms were already under much more state influence than their counterparts in the US or Europe. What we are seeing is more of a shift in emphasis. Beijing is trying to balance the interests of China’s tech champions with its own policy objectives.
Although the timing was dramatic, the intervention to thwart Ant Group’s IPO should not have come as a surprise. Regulators have put pressure on the company before. It looked as though Ant was trying to aggressively push through its IPO on a wave of publicity from investment banks and hysteria among retail investors, before regulators could assess the implications for financial stability.
The investigation into Alibaba is more interesting, because it suggests e-commerce is under closer scrutiny. Previously, authorities had focused on social media and gaming because of the potential for political dissent to spread online.
Ma’s speech might have been the catalyst for heightened regulatory involvement, but there are economic issues the government is trying to tackle. Take the “community-buying initiatives” that became popular during the pandemic, whereby groups of people would club together to purchase discounted groceries via e-commerce platforms. These schemes have sparked concerns over employment, because smaller food retailers are being squeezed out.
This is one of many e-commerce practices the government is targeting, drawing on antitrust guidelines unveiled last year. Policymakers may be concerned about a backlash if tech firms persist with unpopular tactics, such as using AI algorithms to offer consumers different prices for the same product based on their ability or willingness to pay.
As to the financial consequences, the maximum fine for breaching the antimonopoly rules is ten per cent of the previous year’s revenues, which would be insignificant in the context of Alibaba’s gargantuan balance sheet.
Regulators could go further though, and force Alibaba to spin off some non-core units or curtail further empire building in areas such as cloud computing. But the company’s e-commerce business is so vast it would be more or less impossible to break up, and it would not be in the government’s interests to try.
Ant looks more vulnerable. Valuations have been slashed over reports the firm will be forced to reorganise so it can be regulated more like a traditional bank. Officials at the central bank have also ordered Ant to rein in its consumer lending and securitisation businesses.
It is unlikely the company will be able to return to the market with an IPO anywhere near the $37bn originally planned. Having been reminded internet finance in China is subject to huge regulatory risk, investors would demand a much higher risk premium.
Alibaba’s shares have lagged other large Chinese tech firms since its regulatory troubles began. Investors appear to have decided this is an Alibaba-specific issue, and rival Chinese e-commerce firms such as JD.com, Meituan and Pinduoduo will be able to take the opportunity to gain market share.
However, investors need to look at which way the wind is blowing. Antimonopoly regulators are unlikely to stop with Alibaba. If the outcome is a more balanced competitive environment, that would probably benefit the whole market.
There are, for example, smaller companies whose business models look more aligned with the government’s objectives of promoting employment and balanced growth. The government wants traditional food retailers to survive – they have cold-chain facilities, good inventories, fresh-food distribution routes – and a company that helps these firms gain a digital presence is more likely to stay on the right side of regulators.
Regulatory pressure on Ant could also favour large incumbent banks now that their leading digital challenger has had its wings clipped. Chinese financial institutions were already in a healthy position, given the strong GDP growth numbers posted in January. Chinese banks tend to offer higher dividend yields and lower price-to-earnings ratios than their counterparts in other emerging markets. The regulatory moat against digital insurgents gives them a further boost.
As for any lasting lesson that investors in China should take from Jack Ma’s fall from grace, it is a reminder of something they should have known already: you always need to be aware of subtle shifts in the tone of statements emanating from official bodies. No company is big enough to defy the state.
Alistair Way is head of emerging market equities at Aviva Investors
