Hong Kong refuses to bank
on Alibaba's next treasure trove
By Gabriele Battaglia
The Hong Kong Stock Exchange's failure so far to reach agreement with Alibaba Group Holding Ltd on its proposed multi-billion dollar initial public offering (IPO) of shares threatens to be the waste of a great opportunity by the market's authorities. The exchange may have badly lost the chance to list what is probably going to be mainland China's first mega-sized private financial group.
The share sale was expected to be worth around US$10 billion and value Alibaba, China's leading e-commerce business, at as much as US$70 billion. The sale is now widely expected to be moved to New York, though Caixin on September 27 cited an
unidentified source as saying the company is still working toward a listing in Hong Kong, and negotiations with the SFC "are still under way".
Alibaba wanted to maintain a post-IPO board structure that would allow founder Jack Ma and other executives who together control 10% of the company to nominate a majority of its directors, with a shareholder vote on the nomination. This 28-person "partnership system" is essential to preserving the company's innovative culture, according to Ma. Alibaba's two biggest shareholders, Yahoo and Japan's Softbank, have issued statements backing Ma.
Even so, it has run foul of Hong Kong’s listing rules, which hold in theory that all shareholders be treated equally.
Big though Alibaba is, the Hong Kong Stock Exchange might be losing much more than bragging rights - and a potentially much bigger fish - if the IPO does slip to another net.
Alibaba and Minsheng Bank, China's main private bank (10th when the ranking includes state-owned lenders), have entered into an agreement under which the bank will issue specific asset management products to users of Taobao, Alibaba's e-commerce site. The bank will also open its own shop on the website to sell similar products.
For a better understanding, one must have an idea of how the Alibaba system works.
Taobao is a consumer-to-consumer (C2C) platform that proves private companies or individual businessmen the opportunity to open online shops and sell their products - effectively a mix between Amazon and eBay. Alibaba for some time has also offered a banking intermediation service, called Ali-loan, conveying in exchange for guarantees credit towards the users enrolled in Taobao's database and those of other sites belonging to the group.
Such guarantees are based on each seller's ranking in the Alibaba world - one could say on his or her "personal history": Is the seller reliable? Is there any indication of fraud? Do they sell first-rate goods or not? ... and so forth. Once accepted by Alibaba, the small businessman with no hope of getting a loan from a state bank and perhaps otherwise having to turn to the extortionate cost of using a loan shark, secures Alibaba's "protection" and so can expand his business at a reasonable cost.
The next step and most obvious evolution is what we are watching today: bypassing the state credit system and creating a new one. Here the partnership with Minsheng serves as an innovative model. For its part, the bank gets in one swoop Alibaba's huge database - 700 million registered users - an entire subcontinent of prospective customers.
Alipay, Alibaba's online payment platform (similar to PayPal), will of course take part in the business, opening a special relationship with the banking partner. Minsheng has already declared that in future its customers' accounts could be "directly" connected with Alipay. Bank chairman Dong Wenbiao announced in August that within three to five years Minsheng will expand the share of loans to small businesses from around 25% of its portfolio at present to as much as 45-50%.
Now let's wonder what kind of ambitious role this new two-headed protagonist can play in the Chinese credit landscape.
We have long known that China has a problem of bad loans, meaning unproductive loans ending up in the wrong hands, feeding speculative bubbles and actually inflating the debt of local governments. This leads back to the stiffness of the credit system, based on state banks. They generally give loans according to patronage criteria and very little market ratio, with politically established and generally low interest rate.
Thus, big state managers or local government officials get "cheap" money from the bank chairman - they are all colleagues, after all - and then maybe relocate them in speculative forms of investment, such as real estate and the shadow banking system, the deregulated, hidden financial market which threatens to destabilize the economy but provides higher interest rate.
Eventually money does not go back to the banks, which are always at risk of a liquidity crisis, and who pays? The state of course, as happened in a mini credit crunch last June.
Generally excluded from the official credit system are small businesses, which are exposed to a liquidity crisis as soon as their target markets shrink.
Leaving apart the individual's fate - which is actually another huge problem - one of the worst outcomes of this situation for China as a whole system is the widespread low-skilled labor: if the market goes bad, and since the small-business owner cannot hold on to get a bank loan, he or she immediately shifts their business to try to find a more profitable one.
In this way professional careers are interrupted, a very flexible workforce is developed rather than a skilled one, and the system cannot produce innovation. The other effect is that once again small businesses are forced to turn to the shadow banking system.
The Chinese government is perfectly aware of these problems but cannot address them too aggressively. Because of ideological and factional fights within the party and the necessity of balancing different vested interests, Beijing must straddle both the desire to liberalize the economy and the need to preserve the state sector.
Here is why the new partnership Alibaba-Minsheng comes just as the doctor ordered.
Its meaning carries a solution for a couple of problems: first, it is going to be a viable alternative to the state credit system and an early form of banking competition, which is good for the government; second, it can provide a new flow of credit to the private sector.
This is the reason why the new two-headed player can definitely attract millions of Chinese and become a private behemoth: the first, in fact, in the world of Chinese finance.
Alibaba's Jack Ma says his desire to keep tight control of the board structure is neither a "mere profit-sharing mechanism" nor "a vehicle of power to exert greater control over the company," according to an email to employees this month cited by Bloomberg. "The partnership system, operating based on a foundation of transparency, can shield the company’s long-range development plans from the short-term profit-seeking trends of the capital market."
Some commentators argue that by holding out against Alibaba's demands, the Hong Kong Stock Exchange has boosted its reputation for corporate governance while in other exchanges in the region - and in the US - more opaque ownership structures, and dual-share ownership (examples include Google, Facebook, Rupert Murdoch's News Corp and the company owning Manchester United, all listed in the US), are acceptable.
"If you maintain standards, investors pay for the quality. If you improve them, they’ll pay more," Bloomberg reported David Webb, founder of local governance watchdog Webb-site.com, as saying.
Some figures can be put on the loss, according to Jackson Wong, vice president of Hong Kong-based Tanrich Securities. Alibaba would trade in a similar way to Chinese Internet giant Tencent, which adds around 2% to the daily turnover for the Hong Kong exchange, he told AFP.
Reputation enhanced or not, Hong Kong is losing all the revenue that comes with a listing and trading of China's leading finance company - and as China's growth continues, more perhaps than that.
Gabriele Battaglia is an observer of Chinese affairs based in Beijing, the place to be and a good starting point for a look on globalization and its alternatives. He is a member of China-Files agency, and has previously been a writer for PeaceReporter and E-il mensile magazines.
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