Trouble At The Party
Jack Ma & China’s Communist Party Fall Out
After Jack Ma compared Chinese banks to pawn shops amongst a slew of other remarks critical of Beijing, the record-setting IPO of his payment processing company, Ant Financial, was swiftly blocked.
Not soon after, antitrust investigations into Ant Group and Alibaba began. Jack Ma slid from his throne atop the list of China’s richest people, but his decline was representative of much more than the loss of a meaningless title.
In fact, for a while, no one knew what had become of Jack Ma — the richest man in China, according to Forbes in 2019, vanished for 3 months.
He’s Back, But Investors Are Wary
Following his fiery comments, Ma wasn’t seen in public for almost three months before re-emerging briefly for a Zoom call; the Zoom call did little to assuage fears that Alibaba was in trouble, as the company lost nearly $150 billion in market cap since November, 2020.
The Chinese Communist Party (CCP) has a long history of silencing dissent and declawing business leaders who become too outspoken or critical of the government (read: party).
It shouldn’t come as much of a surprise that this practice also has a history of scaring off investors and inducing capital flight, as such a direct form of interventionism is shocking to many volatility-averse Western investors who are not used to such unpredictability in the business world.
Western investors aren’t the only ones wary of China’s market meddling though. This quarrel signifies deeper tensions in Chinese society: as President Xi continues to consolidate power and tighten his grip on the Chinese economy, many citizens rebuke the government’s overbearing advances into the private sector. Many of Alibaba’s clients warned they would walk if their credit info is reported to the government. On the flip side, the CCP’s bout with Alibaba stems largely from the party’s anxiety over tech firms’ burgeoning influence over the country’s financial system.
Why Has The CCP Reacted?
Beijing’s concern is not just the power Alibaba (and Ant Group) may potentially wield over China’s financial system, but the power it already exerts over Chinese media through its extensive web of investment holdings, comprising some of China’s most popular technology and social media companies.
As Chinese regulators undergo their first experiences dealing with private businesses that have become “too big to fail”, it seems the message loudly emanating from China is that no business is “too big to curtail.”
So What Next For Alibaba?
Despite fallout from the investigation, Alibaba’s fundamentals remain strong: it saw 30% revenue growth in its last reported quarter, and an increase of 60% within its cloud computing business.
Alibaba’s marketplaces bring in more than $1 trillion annually in merchandise revenue (GMV) — more than three times that of Amazon — making it the world’s largest e-commerce business by a long shot. It directly controls roughly 60% of the Chinese e-commerce market.
As is the case in many parts of the world, a handful of big tech firms wield a huge amount of influence over many Chinese businesses and services. Alibaba and Tencent control about 90% of the mobile payments market. The top three e-commerce companies (BABA being #1) control nearly 90% of the industry. Uber rival Didi dominates the Chinese ride hailing industry, enjoying a market share upwards of 90%. Tencent’s combined messaging, payments, and social media infrastructure has made them integrated into daily Chinese life on a scale not seen anywhere else in the world.
Partly a result of Beijing’s “chosen winner” policy towards private companies, many of China’s industries are more concentrated than their Western counterparts. And much to the chagrin of the CCP, monopoly power often comes at the expense of consumer rights.
Paradoxically, the CCP has no qualms when it comes to unabashedly pouring funding into inefficient SOE’s that limit consumer choice, restrain innovation, and undercut the growth of smarter, leaner Chinese small businesses. However, the Chinese are consistent in that they are willing to apply pressure on private enterprise, no matter the size.
The Bottom Line
At the end of the day, Xi Xinping will have to reconcile his lofty aspirations to make China a global economic superpower via private enterprise with his party’s distaste for the laissez-faire aspect of capitalism — a certain corporate autonomy that comes along with the free market.
In a sense, China must unleash the beast it has reared if it hopes to realize the true strength of its private sector and make Chinese businesses a staple of the global economic system. (And this is a reconciliation that must be made, as the country’s private sector provides around 80% of urban jobs and constitutes 60% of GDP.)
The CCP’s approach to economic governance goes by many names. It has been dubbed authoritarian capitalism in the West, while Xi himself prefers the term “socialism with Chinese characteristics”. But “market Leninist” seems to be the most fitting term to describe his party’s current ideological approach to the economy: encouraging private enterprise while expanding CCP control over the operations, practices, and leaders of the private sector.
It is a far-reaching, top-down approach that not even titans of private industry like Jack Ma can hope to escape.
