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Alibaba Is a New Brightspot in China-US Relations

Aug 15 , 2014
  • Li Zheng

    Assistant Research Fellow, CICIR

Surprisingly, the IPO of Alibaba on the US stock market brought about many questions and doubts both in China and US, and had nothing but a negative impact on China-US economic and trade relations. The naysayers are incorrect. 

In China, Alibaba’s choice to debut in the US rather than in China was considered to be a failure of China’s capital market. Some mainstream pundits on Xinhua said China’s top ten Internet companies all selected US or Hong Kong as their preferred destination to list, and were valued at over nearly two trillion yuan. Some nationalist pundits criticized Alibaba, Tencent, Baidu and other companies for traitorous behavior, since their profits and users are all in China, but most of their profit was given to overseas investors. The share price of Tencent rose 59% and 98% in 2012 and 2013, respectively, whereas the Shanghai Composite Index fell over 20% in the same period. Furthermore, the largest shareholder of Alibaba is the Japanese Softbank. Softbank invested only 80 million dollars and received nearly 400-fold returns over a decade. This made Chinese nationalists very uncomfortable. 

In US, the listing of Alibaba was considered as a victory for an unruly company. In June, US Economic Security Review Commission (USCC) submitted a report named The Risks of China’s Internet Companies on U.S. Stock Exchanges. The report clearly stated that the corporate structure of Alibaba called for Variable Interest Entity (VIE) to have some legal risks, and might result in future legal disputes. Other analysts said Alibaba would become a powerful competitor to Amazon and other American E-commerce companies, and pose a threat to the US internet economy. In addition, U.S. media said that Alibaba founder Jack Ma had close yet concealed relations with Chinese high-ranking officials, which implied that a level of political risk existed. 

However, those suspicions did not lower the enthusiasm for Alibaba. According to the evaluation by both US and China investment agencies, Alibaba will raise over 200 million dollars from the US market, to become the largest IPO in history. In China, some overseas funds have started to design products to help Chinese investors buy shares of Alibaba. The money speaks for itself. When Alibaba successfully debuts in the US, it will provide an opportunity for both the US and China to re-recognize their bilateral economic relations. The company will become a new link between the two countries. 

Firstly, it shows that China will continue to open its market and further integrate into the international economy by complying with the rules of international business. Alibaba is not only an internet business company but also a symbol of Chinese emerging private enterprises. E-commerce is gradually breaking down the traditional Chinese geographical and administrative intervention in the market, and creating a new middle class in China through entrepreneurship. As Alibaba and its peers select US and Hong Kong to list, it means that the international rules of business are better suited to their long-term development. They will also require its domestic business partners to abide by the same rules to avoid legal disputes or damage to its reputation. It is hard to imagine that those companies listed in the US market could take a careless attitude towards protecting intellectual property rights or banning internet espionage. 

Secondly, it shows that the common interests of China and US are expanding, which will stabilize bilateral economic relations. Alibaba is a model of the association of multiple stakeholders, whose owners include Softbank, Yahoo and the founders’ team from China. After its IPO, more investors from the US and China will join the team. The economic interests will ensure that investors are an important force in stabilizing and promoting China-US relations. Meanwhile, the policy makers of the two countries will be more cautious when deciding the future of bilateral relations, as their decision will impact their respective citizens’ interests. 

Finally, it shows that China’s economic rise will not only benefit the Chinese people, but also provide more opportunities for US and the world. Alibaba is an attractive company with growing earnings. As the leader of Chinese E-commerce, Alibaba created over 23 billion yuan of profit in the 2014 fiscal year, an increase of 170% from 2013. In addition, Alibaba is the master of Yuebao, the biggest monetary fund in China. Considering the boost of E-commerce in underdeveloped cities and rural areas, Alibaba still has a long period of growth ahead. The listing of Alibaba in the US shows that China is willing to share its best companies and business opportunities with the US and the world. As China continues to promote the reform of its state-owned enterprises, the new leadership of China is sending a clear signal to the world.

Li Zheng is an Assistant Researcher at the Institute of American Studies of China Institutes of Contemporary International Relations.

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