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Rahul Jacob: China turns on its own

A mysterious white paper issued by a Chinese regulator was at the centre of a controversy that drove down the share price of Chinese e-commerce giant Alibaba by 12 per cent last week. Alibaba, the most celebrated New York State Exchange debutante last year when it raised $ 25 billion in September, was strongly censured in the document, for not adequately policing the sale of counterfeit goods on its consumer website Taobao by China’s State Administration for Industry and Commerce (SAIC). The regulator revealed that it had first raised the issue in August last year.

This document then disappeared as abruptly as it had appeared on the SAIC website in the space of a day or so, suggesting that someone high up in Beijing had had second thoughts about subjecting what is now arguably the country’s most high-profile company to a public humiliation. Alibaba’s Vice-Chairman Joseph Tsai hit back, describing the white paper as “flawed” and arguing that the August meeting was routine.

But the damage has been done. Foreign companies will see the episode as another reminder of how arbitrary China’s government can be, even in dealing with its blue-eyed boys. Alibaba’s founder Jack Ma is both polite and politic; he tells people what they want to hear. He has been a supporter of the government’s plans to rebalance the economy from being export-driven to one more solidly founded on domestic consumption. On Monday, he was in Hong Kong speaking to an audience mostly of students, announcing a fund for young entrepreneurs of HK$ 1 billion. Mr Ma said that even students who participated in the recent protests in the city for universal suffrage that were seen as also against China should be eligible because everyone was allowed mistakes in their youth.

Alibaba’s successful listing was partly the result of the widespread belief that Mr Ma was in the good books of Beijing’s leadership. But the events of last week are a reminder that sections of the bureaucracy and ultimately Beijing itself can be utterly mercurial. The episode is a reminder that rebalancing China’s economy might well happen before the country can develop the foundations of a society built on the rule of law. As own goals go, the humiliation of Alibaba less than six months after it listed in New York is not quite of the order of those bureaucrats in Delhi whose fancy footwork and parsing of language came up with the retrospective tax, but it is nonetheless an ugly omen for business in China.

I asked a business editor friend in Hong Kong this week what he thought might be the real reason behind the attack on Alibaba. “It’s either a goof-up or a conspiracy,” he replied, confessing to be as puzzled as any observer. It could indeed be a bit of both. At one level, it is implausible that a complaint about the sale of counterfeit goods (which Alibaba itself has said it was tackling) could be whipped into such a cause celebre
unless it had the approval of Beijing. Foreign companies have asked for action on this count and been brusquely rebuffed. There are entire markets in Beijing itself known for the quality and variety of their fake goods.

The theory that the showdown might be the work of overzealous bureaucrats was strengthened last week by the appearance of another mysterious transcript, allegedly of a conversation between SAIC officials and Alibaba executives last summer. An SAIC official is quoted as saying that fining the company just once would be too lenient. “It would only be normal if you were fined hundreds or thousands of times a year,” the official said. The conversation then segues to a complaint that sounds like a prelude to seeking a bribe; a year’s salary at the SAIC is said to be equivalent to “less than how much one of you makes in a month”, the Financial Times reported.

Readers who have to run businesses in India will perhaps see similarities between the governments of the two countries. There is a residual dislike of business that one would expect among the mandarins of a communist country – and a socialist one like India’s. And there is the reasoning that business has it too good and, thus, must share the spoils. Whether the transcript was genuine is hard to ascertain. In another strange twist to this bizarre tale, it disappeared even more abruptly than the white paper had done, a few hours after it had appeared.

In the past couple of years, China has variously targeted the foreign subsidiaries of large Western multinationals for breaking its anti-trust laws and for corruption. Both allegations are a bit rich coming from a government whose state-owned enterprises control wide swathes of the economy and whose own corruption is so endemic that rooting it out has been a major plank of President Xi Jinping’s first term.

The lesson for India may be that what investors want most of all is predictability and some sense of fair play. China’s repeated and arbitrary actions against multinationals and now Alibaba suggest they are unlikely to find it there. There is money waiting to be invested in India from countries like Japan and the United States simply because we are a democracy, albeit with a similarly meddlesome bureaucracy, that decision-makers in those countries favour with their hearts – even if their more rational assessments lean towards China’s much bigger market.

For its part, Alibaba faces the ugly prospect of class action lawsuits in the United States because the SAIC white paper alleged the warnings about counterfeit goods happened before the company listed in September and, thus, ostensibly should have been disclosed in listing documents. The controversy of the past week will certainly make it more difficult for other Chinese companies to list in the United States. Beijing will then have to ponder whether such a bloody-minded onslaught against a stock market and global e-commerce darling was necessary.


Twitter: @RahulJJacob

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