Alibaba and the $40-billion squeeze

The Chinese government is not renowned for its openness, particularly not in matters involving its own citizens. So last week’s spat between a regulator and one of the country’s biggest companies offered a rare glimpse into domestic Chinese politics.

The company in question is Alibaba, a thriving online marketplace founded by one of China’s most charismatic businessmen, Jack Ma. His company is currently worth about $220-billion – nearly $40-billion less than it was worth on Tuesday last week. The cause? A highly critical report by China’s State Administration for Industry and Commerce (SAIC).

The report accuses Alibaba of turning a blind eye to illegal activities in its marketplaces, particularly the marketing and selling of counterfeit products like fake French wine and knock-offs of designer handbags. It also accuses Alibaba employees of accepting bribes from the counterfeiters in exchange for being allowed to continue trading.

The SAIC does not mince its words: “For a long time, Alibaba hasn’t paid enough attention to the illegal operations on its platforms, and hasn’t effectively addressed the issues. Alibaba not only faces the biggest credibility crisis since its establishment, it also casts a bad influence for other Internet operators trying to operate legally.”

But even more damaging than the report itself is its timing. It emerged from a meeting held in July 2014, but was only published on the 23rd of January 2015. Very convenient for Alibaba, which listed on the New York Stock Exchange in September 2014 and raised $25 billion – the largest IPO in world history.

As a result a half a dozen large New York law firms have already filed class action suits against the company. One example alleges that the company “issued materially false and misleading statements regarding the soundness of Company’s business operations, the strength of its financial prospects and concealing substantial ongoing regulatory scrutiny.”

And yet, just two days later, the leader of the SAIC was publicly congratulating Alibaba for being “steadfast and resolute” in its fight against counterfeit goods. It dismissed the July report as a mere record of a meeting, and not an official document. Alibaba in turn promised (on its corporate blog) to set up a 300-strong “anti-counterfeit special operations battalion”.

When the report first emerged, several analysts mentioned that Chinese officials are growing increasingly uncomfortable with Jack Ma’s power and prominence. “The SAIC is now teaching Alibaba a lesson and telling it to learn its place,” said Li Muzhi, a Hong Kong-based analyst.

The SAIC’s subsequent retreat says a lot about China’s current internal politics. Alibaba’s reaction to the report was both public and pointed – accusing regulators of bias and improper conduct. Publicly criticising the state would have been unthinkable not too long ago. Now a businessman has not just taken on the state – he has beaten it as its own game.

An interview with Bloomberg Business last week makes it clear just how little Jack Ma fears the once ferocious Communist Party. When asked if he will release Alibaba’s data to the government he does not hesitate: “I’ve told them that if they come to me for national security, for antiterrorism, we can work together. As for the rest, the answer’s no.”

Does this mean China stands on the brink of a new age of freedom democracy? Of course not. A billionaire can thumb his nose at a medium sized regulator. An ordinary citizen would not even dare to do so. But the fact that private enterprise is beginning to act as a check on state power – even in these very limited circumstances – is truly remarkable.

There’s a wonderful twist of irony running through this fracas. The Chinese state has long prided itself on its control over the internet. Thanks to its “Great Firewall”, ordinary Chinese people are unable to access anything critical of the state. And yet a local internet billionaire, with a company listed in New York, just made fools out of an entire government department. Oops.

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