From the first days of China's Internet, one of the biggest gripes of China's tech entrepreneurs has been that Western investors just don't understand them. Sohu.com founder Charles Zhang, one of China's tech pioneers, launched into an epic rant on that subject when I interviewed him in 2006 for one of Fortune's earliest stories about life behind "The Great Firewall of China." "I have to deal with a bunch of investors who don't live in China, can't speak the language, and don't even look at my site," Zhang fumed. "All they want to talk about is the next quarterly earnings statement or how to replicate some business model from the U.S."
Eleven years on, that remains a common lament among China's tech founders. And maybe they have a point. Consider Wall Street's reaction last Thursday to quarterly financial results announced by Alibaba (NYSE:BABA). The Chinese e-commerce giant reported that, in the three months ending in March 31, it raked in $1.55 billion in net income--nearly double net income in the same quarter last year. Good news, right? Well, global investors weren't impressed. Alibaba's shares tanked more than 5% in morning trading. Why? Apparently because the company's 64 cent earnings-per-share ratio missed analysts' expectations. By a penny.
BABA's share price recovered later in the day as it dawned on folks that maybe it didn't matter if net income lagged a little. The company is investing in data storage, entertainment and other areas expected drive future growth. Markets also were mollified by the fact that revenue for the quarter shot to $5.6 billion, up 60% (!) year-on-year. (Alibaba's "disappointing" net income for the January to March quarter was double that of Amazon for the same period, and the Chinese company's revenue grew nearly three times faster than Amazon's.)
Since January, Alibaba's share price is up almost 40%, and now trades at about $123, restoring Jack Ma to his position as China's richest man. But you can see why maybe Jack and his co-founders might sympathize with Rodney Dangerfield.
Thursday's morning sell-off was only the latest tiff in Alibaba's long-running love-hate relationship with global investors. Jack has made no secret of his disdain for the Anglo-American idea that shareholders know best, most famously in 2009 when he declared: “Let the Wall Street investors curse us if they wish." In 2014, he and co-founder Joseph Tsai aborted plans to list on Hong Kong's stock exchange because regulators balked at changing Hong Kong's rules to allow Alibaba's founders to retain control a majority of the seats on the board.
Instead Jack and Joe took Alibaba's IPO to the New York Stock Exchange, which was happy to bless their proposal. Alibaba's September 2014 on the NYSE earned $25 billion, and remains the world's biggest IPO. But the honeymoon was brief. BABA's share price debuted at $68, surged to a high of $120 in November, then tumbled into a year-long slump, weighed down by concerns Beijing would crack down on Alibaba for trafficking counterfeit merchandise and the faltering growth of China's economy. A September 2015 cover story in Barron's assailed Alibaba for cooking its books, faulted management for embarking on a reckless acquisitions spree, and predicted Alibaba's stock, then trading at about $64, could fall another 50%. China bear Jim Chanos piled on, attacking Alibaba's accounting as "some of the most questionable I've ever seen."
No surprise, then, that when it came time to float shares of Ant Financial Services Group, his online financial services powerhouse, Jack didn't rush back to Wall Street. This time, he opted to list on China's domestic stock markets, where transparency requirements are far less onerous and investors far less demanding.
Ant's IPO has been among the world's most anticipated listing deals. The company provides the technology that enables customers on Alibaba's e-commerce sites to make purchases, and operates Yu'e Bao, a money-market fund that has become the world's largest. It also runs an online bank, MYbank. In its last financing round in April 2016, Ant was valued at $60 billion, double the value of Snap. The IPO was widely expected to happen later this year.
Alas, China's capital markets have other trade-offs. A report this week the Financial Times says Ant's China IPO has been postponed until the end of next year at least. The FT says Ant's IPO is stuck pending crucial regulatory decisions, which no one wants to take responsibility for in a year when China's ruling Communist Party is choosing its next generation of leaders. Continued turmoil in China's stock and credit markets doesn't help.
For now, to fund Ant, Jack has snubbed both Sand Hill Road and Wall Street in favor of state-controlled financial institutions from China, among them China's giant sovereign wealth fund, China Investments Corp. Ant may have to wait a while longer for an IPO. But with homegrown backers that big, Jack can afford to wait--and to let Wall Street investors curse as loudly as they like.
Enjoy the weekend!
Trade and Finance
- Do defaults loom for Chinese insurers? China's insurance industry remains a focus of concern about the stability of the nation's financial system. Foresea Life Insurance, one of China’s largest insurers has warned of mass defaults and social unrest unless the industry's regulator rescinds a edict prohibiting the company from issuing new products. The Financial Times reports that in a recent letter to China’s insurance regulator, the company said it expected nearly $9 billion in redemptions this year and might be unable to meet payouts if it can't sell new policies. In December, the China Insurance Regulatory Commission slapped a three month ban on the company. February, the agency banned Foresea chairman Yao Zhenhua, from the industry for 10 years. Foresea urged the CIRC to lift the ban “in order to avoid inciting mass incidents by clients and localised and systemic risks, producing greater damage to the industry.” Foresea is a unit of Baoneng Group, a property and financial conglomerate that last year attempted a hostile takeover of China Vanke, one of China’s largest residential developers. Baoneng is one of many Chinese companies that has used the sale of “universal insurance” policies--vaguely defined products promising high yields and guaranteed payout to finance its stake in other listed companies. Such policies are, essentially, investment vehicles offering and guaranteed payouts on maturities. The CIRC has tried to clamp down on universal insurance policies in recent months as part of a broader push by president Xi Jinping to "deleverage" China's financial system. Financial Times
- China's has the world's biggest banking system--but it may be a dubious honor. China's banking system has overtaken that of the eurozone to become the world's largest by assets, according to an estimate by the Financial Times. But that distinction reflects both the country's increased affluence and its excess reliance on debt to drive growth, according to the FT. The report quotes Cornell University economist and former International Monetary fund China head Eswar Prassad as warning: "The massive size of China's banking system is less a cause for celebration than a sign of an economy overly dependent on bank-fianced investment, best by inefficient resource allocation, and subject to enormous credit risks." Many economists trace that excess debt to government policies following the 2008 when Beijing slashed interest rates and ramped up public spending to keep China growing in the wake of the global financial crisis. The result was an explosion of credit, both on balance sheets and off. With the all-important 19th party congress of China's Community Party fast approaching, the FT notes, then nation's "top leaders have signaled that they intend to shift policy forces away from stimulus towards risk control." Financial Times
China in the world
- China snubs Singapore at Xi's "Belt and Road Summit": China's high-profile "Belt and Road Forum" was billed as a huge success in China's state-owned media. Group. Reviews in the Western press were mixed, with some detractors noting the gathering's unfortunate acronym, and others suggesting the meeting was as notable for who didn't attend as for those who did. But reports inside and outside China highlighted the one guest who wasn't invited: Singapore's prime minister Lee Hsein Loong. Hong Kong's South China Morning Post said China's decision not to invite the Singaporean leader "highlights the still-strained ties between the two countries." The Post quoted a senior research fellow at the Chinese Academy of Social Sciences as saying Beijing's snub reflected a growing belief that Singapore only cares about its economic relationship with China and has chosen to rely on the U.S. for its security. Relations between the two nations hit a rough patch in November when customs officials in Hong Kong seized nine Singaporean military vehicles in transit back to Singapore following exercises in Taiwan. South China Morning Post
- Duterte says Xi threatened war if the Philippines drills for oil: One Southeast Asian leader who has moved to improve ties with Xi in recent months is Philippine president Rodrigo Duterte. But Duterte's remarks following his visit to the Belt and Road forum left analysts wondering whether the relationship may not be as amicable as was thought. Duterte said Xi warned him pointedly that if Manila tried to enforce international arbitration ruling and drill for oil in a disputed part of the South China Sea, China would "go to war." Duterte he was the one who had raised the drilling issue in his meeting with the Chinese leader. He said he told Xi: "We intend to drill oil there, if it's yours, well, that's your view, but my view is, I can drill the oil, if there is some inside the bowels of the earth, because it is ours," Duterte said in a speech after their meeting. "His response to me, 'we're friends, we don't want to quarrel with you, we want to maintain the presence of warm relationship, but if you force the issue, we'll go to war." Reuters
- No thaw in chilly relations between Beijing and Taipei. I was in Taiwan last week, and got an earful from Taiwanese business leaders about how strained relations between Beijing and Taiwan's president Tsai Ing-wen have made it almost impossible for Taiwanese companies to do business in the mainland. Tsai is leader of Taiwan's independence-leaning Democratic Progressive Party. She campaigned on a pledge to stand up to Beijing, and resist efforts to integrate the island politically and economically with the mainland. Polls suggest a sharp upswing in anti-mainland sentiment in Tsai's first week in office. In recent weeks she has sought to ease tensions by giving a series of press interviews aides describe as meant create a roadmap for "goodwill" in cross-strait relations. Tsai told Reuters last month she hoped Xi could "show a pattern and flexibility, use a different angle to look at cross-Strait relations, and allow the future of cross-Strait ties to have a different kind of pattern." Beijing has shown no sign of reciprocating. Reuters
- Is China getting better at "soft power"? The Economist argued in a recent essay that Chinese scholars have made a concerted effort to learn from Harvard political scientist Joseph S. Nye's theories about "soft power." Nye says sometimes tools like persuasion, likability and charisma can be more effective in getting shaping the behavior of countries than military or economic sanctions. The Economist claims Xi has sought to make himself "promoter-in-chief" of this new form of power, or as it's called in Chinese, ruan shili. In a recent interview of their Sinica podcast Jeremy Goldkorn and Kaiser Kuo asked Nye himself about China's ability to expand its use of soft power. Nye wasn't optimistic. SupChina
In other China news
- Thanks to a Chinese peroxide company, Talking Tom Cat is a unicorn. Not long after my kids were old enough to play games on a mobile phone, someone persuaded me to download an app for them that featured a cartoon cat named Talking Tom, who would repeat anything said to him in a high-pitched squeak that sounded like he'd just inhaled helium. It reduced the kids to helpless giggles. They were instantly obsessed. I remember Talking Tom as the beginning of their by now incurable addiction to digital gadgets. Thanks to the intrepid reporting of Bloomberg's Adam Satariano, I learned this week that Talking Tom is the creation of two Slovenian high school sweethearts named Samo and Iza who turned Talking Tom into a multi-million dollar franchise, and then sold it in 2007 to Zhejiang Jinke Peroxide Co., an obscure Chinese chemical company -- for $1 billion! You can't make this stuff up. Bloomberg