Once in a while, you dabble in a business where you can’t possibly have a complete overview of all moving parts but must look at the business in its entirety to keep your analysis grounded. In Alibaba, you deal with a sprawling octopus with its arms everywhere in Chinese digital society
What happened lately
“Lately” isn’t the right word. What’s going on in China right now began years ago, but it’s just now that things have escalated to a real panic and sell-out of Chinese equities.
Things began with the US-China trade war and the 2016 presidential election. The trade war took off on July 6, 2018, when the US imposed a 25 percent tariff on $34 billion worth of Chinese imports, marking the first in a series of tariffs imposed during 2018 and 2019. It sparked a sequence of distrust back and forth. And most critically, it sparked a race — which Europe has tried hard to participate in — in terms of who could build the greatest “national champions” in companies that could compete on the world stage.
To be fair, the trade war(s) have brought in several other factors other than trade that have pushed the U.S. and other countries to take a harsh stance against China, including the South China Sea dispute, the repression of Uyghurs in Xinjiang, the China-Taiwan divide, and the unfair treatment of Hong Kong. On June 14th, China was declared a “global security challenge” by NATO, and on June 23rd, the US banned solar panel imports from Xinjiang. Then on July 9th, the U.S. added 23 Chinese companies to its economic blacklist, and finally, on July 14th, the Senate passed a bill to ban all products from Xinjiang.
In one way or the other, China’s actions, be they social or geopolitical, are all guided by the same purpose of achieving dominance and portraying the Marxist-Leninist party as an effective governing force for the present century that’s able to handle a country of 1.4bn people. Ultimately, this is tied to economics. The economics has to work. Otherwise, the CCP won’t pull it off.
Xinping is well aware of that fact. In July, he reminded the state that “economic work must be our core task. If we succeed in that, then the rest of our tasks become easy.”
But then the question is what kind of economics the CCP wants to push China forward. In a lot of ways, it’s the same kind of economics that the West is instilling to deal with dominating tech business through anti-monopoly measures and masses of fintech innovations that bypass the traditional financial system. The difference is just that China seems to be more aggressive and controlling in doing so.
Jack Ma used to be thought untouchable. That was until he held a speech in October 2020 at the Bund Summit in Shanghai speaking against the CCP’s way of keeping control of China’s sprawling financial sector. (Here’s a translation of the speech). He accused regulators of stifling innovation and being out of touch. Soon after, Ma was brought in by Chinese authorities for questioning, and the next day, the $37bn IPO of Ant Financial — which should have been the world’s largest — was put on ice despite having previously given green light. Ant Financial was subsequently ordered to transition all of its business, including Alipay, into a financial holding company and Ma disappeared for a while. Alibaba owns 33% of Ant Financial (which is now Ant Group).
Meanwhile, the Chinese government recently launched their digital yuan, the e-CNY, which might post challenges to Alibaba’s (or Ant’s) payment networks. It shows another attempt from the CCP to regain control of the financial system. The e-CNY is estimated to capture 9% of the market as a redundancy for the retail payment system, and, as another slap on the wrist, the CCP has made it clear that currency couldn’t be linked to Alipay.
But this isn’t the only time Alibaba has fallen under the limelight. China’s State Administration for Market Regulation (SAMR) was founded in March 2018 to strengthen the CCP’s anti-monopoly enforcement. In December last year, that administration launched an antitrust probe into Alibaba for abusing its dominant market position by urging merchants to only choose one platform. A “pick one from two” practice, they called it. The probe led to a record-breaking fine of $2.75bn.
But these events aren’t the only ones that have sparked the recent panic of Chinese equities.
On June 30th, ride-hailing giant Didi Chuxing went public in New York. The timing wasn’t great. Because few weeks before listing, China’s cybersecurity watchdog, the Cyberspace Administration of China (CAC) began questioning the security of Didi’s network and the sensitivity of information displayed on the company’s mapping function. The CAC asked Didi to delay its listing, but despite the vague warning, Didi decided to press forward with the IPO. The IPO raised $4.4bn in a lucrative market environment and it became the largest overseas listing of a Chinese company since Alibaba.
That didn’t land well with the CAC. A few days before the opening bell, the administration announced an investigation into Didi on suspicion that the company had violated data privacy and national security laws. Didi was barred from registering new users and all Chinese app stores were instructed to remove Didi’s app. The incident prompted other Chinese tech giants to look inward to not get scrutinized for any lurking data issues. Tencent halted new user registrations for WeChat citing “security technical updates”.
Social issues in China also fueled the country’s recent regulatory crackdown. Alongside national security and data privacy, China has an increasing incentive to reduce the growing wealth gap in the economy. Ostensibly, a big part of that issue lies with how online businesses have monetized essential services such as private education. Since New Oriental Education’s US IPO in 2006, The Chinese private education sector has grown into a $100bn industry at the cost of millions of Chinese parents who plow their life savings into private online tutors in the hope of enabling their children a brighter future.
It’s no secret that China’s educational system is stressful. The suicide rate among students is elevated. The system has helped fuel a hyper-competitive societal obsession with academic achievement through reckless pricing and aggressive advertising to offer around-the-clock, mind-numbing tutoring. The Chinese government sees this as a potential demographic crisis and has forced all after-school tutoring companies to register as non-profits while banning classes on weekends and holidays. The entire business fundamentals of New Oriental Education and TAL Education, both public companies, were gone in one fell swoop. And with the CCP’s strong criticism of the monetization of essential services by the private sector, there are now concerns that the next industry in line will be healthcare.
The question is how much further regulatory crackdowns could go, whether they’re necessary or not, and whether they’re fair or not. The question is also who will be next in line.
Now, this write-up is about Alibaba so we’ll dive more into the future implications to Alibaba from all of this later. It’s difficult to gauge the future without understanding the past. Let’s first take a step back and look at the company’s history.