Commentary

Alibaba and a missing tale of market reforms

by Curtis S. Chin

As equity markets from Tokyo to New York enter more volatile times, it’s worth taking a pause to reflect on the need for continued capital market reforms, particularly in China.

Indeed, just eight minutes after Chinese e-commerce firm Alibaba made history with a blockbuster Initial Public Offering, New York equity markets seemingly hit their peak and have been trending downward ever since. The spread of Ebola and unrest in the Mideast as well as Hong Kong have added to market uncertainty. The storyline is no longer a straightforward one of China’s and Chinese companies’ rise.

As my Milken Institute colleague, Kevin Klowden, and I have written, the debut of Alibaba marked an amazing confluence of expectations, opportunities and pent up demand by investors still eager to find treasure in China, now the second largest economy in the world — some say it is already the largest based on the latest International Monetary Fund data — having surpassed Japan in 2010. Earlier this year, I had the honor to be named the first Asia Fellow of the Milken Institute, a California-headquartered nonpartisan economic policy think tank focused in part on driving change through innovations in capital markets.

In the case of Alibaba, media and investors understandably focused on the size of the deal. Jack Ma, the Alibaba founder and executive chairman, who once struggled to raise a few thousand dollars to start a business in China had made history with a $25 billion listing in the United States this September.

That IPO, became the world’s largest to date, topping the $20-plus billion IPOs for both the Agricultural Bank of China in 2010 and ICBC, another Chinese bank, in 2006.

Yet, as Klowden and I have argued, that the listing took place in the United States — out of reach of the average investor in China given that nation’s restrictions on capital flows and its own citizens’ investment opportunities — also speaks volumes about how much further China must go to liberalize its capital markets and ensure greater domestic access to capital to finance further innovation.

Ma may well be one of a kind in China for now, but with the right policy environments, he could well be one of many future Chinese entrepreneurs who become household names in and outside of their own country.

Steve Jobs, Bill Gates, Mark Zuckerberg, Pierre Omidyar and other technology pioneers succeeded in growing an idea and business amidst a U.S. enabling environment marked by rule of law and access to both domestic and international capital and financing. China too would be wise to do the same and take steps to foster and finance future Jack Mas at home.

As for the Alibaba CEO and founder, his days struggling to raise funds for a business launched out of his Hangzhou, China, home are long past.

His challenge now is not access to capital, but to live up to the rhetoric and promise described so well in a pre-IPO road show that reportedly included some 100 investor presentations in 10 cities around the world.

His success to date should also be a driver for change in his homeland.

So what next? The listing results have been blockbuster and dramatic as institutional investors, hedge funds, trading companies and others lined up for a piece of Alibaba. Even before the first sale, the company was valued at a very high 44 times earnings.

However, neither this nor a lack of transparency and a convoluted governance model — which prevented Alibaba Group’s listing on the Hong Kong Stock Exchange — was enough to dissuade investors. Investors worried less about a tale of 40 thieves and focused more on riches that might lie ahead.

To paraphrase David Bonderman of TPG Capital at our first Milken Institute Asia Summit, which coincidentally took place in Singapore the day of the Alibaba listing, but prior to the opening bell in New York, “Alibaba has probably the worst governance in the history of the world.”

Demand though pushed up the stock nearly 40 percent on its first day as investors bought the Alibaba story. The stock closed at more than $98 per share on its first day of trading. China regulators and indeed Ma’s fellow citizens, including those cut off from investing outside of China, may well have looked on with mixed feelings as Jack Ma and Alibaba made financial history.

Rumors continue that Ma will follow the lead of some of China’s wealthiest and relocate outside of mainland China, to a place such as Hong Kong, where rule of law is stronger.

Though Alibaba’s share price may well continue to fall and rise with the company’s prospects in the months and years ahead and added scrutiny comes to Alibaba’s governance and ownership structure, Ma should serve as an example for China’s future entrepreneurs. Wealth and job creation can be achieved, even in China, with minimal government support. Ma turned to the US financial markets to finance Alibaba’s expansion. China’s challenge is now to show it can do the same.

Earlier this year, China’s State Council indicated it would be moving forward on a number of financial reforms. These included making progress toward direct bond issuances by local governments, removing some of the limits on using financial derivatives, and streamlining the approval process for IPOs as well as increasing quotas for both inward and outward foreign investment.

As Bonderman added at the Milken Institute Asia Summit in Singapore, “Asian capital markets, if not in their infancy, are unruly teenagers.”

Markets indeed have “to grow up.” How fitting it would be if last month’s successful Alibaba Group IPO also provided the magic words for a further opening of China’s financial markets and a deepening of capital market reforms. Indeed, particularly in volatile economic times, the world needs more tales of “Open Sesame” — of opening and reforms — and not of poor governance, missing accountability and “40 Thieves.”

Curtis S. Chin, former U.S. ambassador to the Asian Development Bank, is managing director of advisory firm RiverPeak Group and Asia Fellow at the Milken Institute. Follow him on Twitter at @CurtisSChin

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