Calculated Consequences: The Case of Alibaba
May 12, 2021
Just as Icarus flew too close to the sun and tumbled back down to Earth, so too has Jack Ma fallen from on high following his blistering attack on China’s government regulators in late 2020. Since then, Alibaba, the company that Ma founded, has suffered numerous setbacks as China’s government has sought to reign in the tech giant via fines and new regulations. These measures, while seeking to address many longstanding concerns, were not politically possible just a few short years ago given the company’s importance to the Chinese economy and the Chinese government’s technology development plans. However, the potential for Ant Financial Group’s (an affiliate company of Alibaba) initial public offering (IPO) to massively enrich a group of powerful investors, coupled with Ma’s overt challenge to regulators and Alibaba’s continued unwillingness to comply with government policies, has made regulation a political necessity.
Alibaba’s Fall from Grace
Taking the stage at the Bund Summit in Shanghai on October 24, 2020, Jack Ma launched into a series of attacks on China’s government regulators and traditional financial institutions. He argued that China needs more regulators who are “experts in policies” rather than “experts in documents,” and that China’s contemporary banks are simply a continuation of an outdated “pawnshop mentality.” This criticism was met with harsh reaction by government regulators in Beijing. In what amounted to a private dressing down, the China Securities Regulatory Commission, and three other regulatory bodies, summoned Ma and two other members of Alibaba’s leadership, Eric Jing and Hu Xiaoming, to discuss regulatory oversight. Following this, various government regulators announced a number of new fines and regulations on Alibaba, including the suspension of Ant Financial Group’s (Ant Group’s) IPO on the Shanghai and Hong Kong Stock Exchanges, a record $2.75 billion fine for antitrust violations, and ultimately a forced restructuring of Ant Group into a financial holding company to be overseen by China’s central bank.
Ma himself has also faced severe consequences. Aside from getting summoned by various government regulators, Ma neither appeared in public nor made any public statements from November 2020 until January 2021. This sudden, harsh treatment of one of China’s star companies and entrepreneurs stands in stark contrast to the way that both Ma and Alibaba previously engaged with government regulators.
Alibaba’s Place in China’s Economy
Founded in 1999 in Hangzhou, China, Alibaba was established as an early Chinese e-commerce service that sought to provide Chinese companies with a business-to-business platform. Its gradual success helped to facilitate the company’s expansion into other sectors and allowed it to develop a business ecosystem comprising cloud computing, digital media and entertainment, and various innovation initiatives. One of its businesses, Ant Group, consolidated multiple components of Alibaba’s existing financial technology (fintech) businesses—such as Alipay, a third-party mobile payment platform—and helped to make Alibaba a leader within the global fintech market.
Throughout its development, Alibaba had its fair share of run-ins with regulators, but it managed to emerge relatively unscathed. In 2015, for example, the presence of counterfeit products on Taobao, a subsidiary of Alibaba and China’s largest e-commerce business, drew the attention of China’s State Administration for Industry and Commerce (SAIC), which issued a report laying out their evidence against Taobao. However, after only a week of criticism from Alibaba, the SAIC withdrew its report to “avoid hindering” the success of Alibaba’s IPO on the New York Stock Exchange. Similarly, China’s government regulators have repeatedly allowed both Alibaba and many of China’s other large technology companies, such as Tencent, to forgo normal reporting requirements for large deals that gave them a monopolistic presence in their respective industries.
The decision of regulators to either back down or turn a blind eye to Alibaba’s infractions helped to bolster its forefront position in China's economy and allowed it to become not only a major flagship for innovation within China, but also a symbol of China’s economic success to observers around the world. This unique position aligned Alibaba’s success with the government’s overall agenda of becoming a technology superpower and gave the company’s leaders a level of influence and protection within the government itself. Situated within this codependent relationship, had regulators gone after Alibaba they would not only have compromised a pillar of the Chinese government’s economic agenda, but also angered Alibaba’s business leaders and investors whose assets the government needed for its own goals. However, while this relationship allowed Alibaba to evade most regulation up to this point, Ant Group’s IPO would have put China’s leaders in an uncomfortable position, and necessitated action on their part to curtail Alibaba’s influence.
While China’s political system is authoritarian in nature, China’s leaders still face significant political constraints. As noted by Yuhua Wang in his book, Tying the Autocrat’s Hands: The Rise of the Rule of Law in China, “authoritarian rulers cannot solely rely on force to stay in power; they need cooperation as well—especially from interest groups that control valuable assets.” In the case of Alibaba, the company’s importance to the government’s economic and technological development agenda made it more convenient for the government to cooperate with Alibaba and tolerate the company’s transgressions than doing otherwise. Regulating Alibaba at that time would have risked turning Alibaba’s business leaders and investors against the Chinese leadership, and made pursuing the government’s goals more costly. Such regulatory action would have likewise risked unnecessarily alarming other companies operating in the same space.
However, the potential for Ant Group’s IPO (the world’s largest, previously valued at $34 billion) to significantly benefit a group of powerful investors altered the calculus behind the decision to regulate Alibaba. Such a large payout would have signaled to other players within the Chinese market that companies can take actions that run contrary to the government’s policy objectives, and even publicly question the government’s ability to regulate the market, without consequences. This signal would, in turn, have risked the central government’s credibility as a policy maker and enforcer. In short, Ant Group’s impending IPO triggered a shift in the government’s cost-benefit analysis, and made cracking down on Alibaba less costly than inaction.
Throughout its history, Alibaba has been protected from certain regulations by the government itself through the alignment of its success with the central government’s economic development goals. The recent fines and regulations that Alibaba now faces should therefore not be understood as the natural regulation of illegal activities, but instead as the calculated consequences of a political challenge to the government’s policy setting authority.
Tyler Hayward is a former intern with the China Power Project at CSIS.