Why is Alibaba's “open sesame” spell paritcularly effective?

By He Qinglian on February 5, 2015

Chinese company Alibaba has recently made news headline in China and the US. The fact that the company reconciled with the SAIC (State Administration for Industry and Commerce of the People's Republic of China) over the white paper dispute proved once again that Alibaba's “open sesame” spell is particularly effective, always manages to open doors at critical junctures.

And take a look at how Ma Yun and his company grew over the years, one would find the issues involved are far more than the commonplace problem of government-business collusion in China and they demand deep thinking.

In 2012: accusation of concealing information became a turning point for Ma Yun

This time, the news that seven law firms in the US jointly filed a charge of “suspected of concealing information of (his company) being investigated by regulators” against Ma Yun was welcomed by commentators in China who would like to see Ma get taught a lesson. Many of them said, “US investors won't be fooled easily”. But whatever wishes they might have, reality won't necessarily bend to their will.

In the morning of February 5, the Wall Street Journal reported that the dispute between the SEC and the Chinese arms of the big four accounting firms is about to be settled—a sign that Alibaba might eventually manage to get away with it unscathed. After all, those 130 Chinese companies were suspected of financial fraud, a charge a lot more serious than what Ma Yun faces today.

As a matter of fact, this is not the first time Ma Yun withheld information. He did so and got caught in 2012, and yet he didn't just get away with it unscathed but also brought his business to new heights.

Yahoo! used to be a dominant shareholder of Alibaba, owning 22.6% of the company's stock. Yet when Ma Yun separated Alipay from Alibaba and turned it into another company owned by Ma himself. Yahoo! Investors deemed the failure to disclose the move in a timely manner an incident that seriously affect their interests, and so Alibaba was forced to buy back its shares from Yahoo!.This incident, however, did not bring about Ma Yun's downfall. Instead, he managed to buy back half of the shares owned by Yahoo! at 7.6 billion dollars after he sold Alibaba's shares to investment institutions including China's sovereign wealth fund, China Development Bank and two other well-known Chinese investment companies. With these institutions as new stakeholders of Alibaba, the company subsequently reached ever and ever higher.

Grave accusations no big deal for Ma Yun

To withhold information is in fact being dishonest, an accusation like this is a grave one for a publicly listed company. Yet for Ma Yun, it was no big deal.Let's first look at the SAIC white paper released on January 28. The white paper identified five problems with Alibaba's Taobao, including lax verification of goods information, lousy management of selling behavior, defective credit rating system, and loose supervision of internal staff.

In response, Taobao issued a statement saying that SAIC Network Regulation Department director Liu Hongliang was “emotional” in carrying out his law enforcement duty and that it decided to file a complaint to SAIC.

That night, the SAIC white paper was scrapped. The tug-of-war between a mega enterpise and a government regulation body ended in just a matter of days and SAIC chief Zhang Mao shook hands and made peace with Ma Yun.

It was after this dispute that the public came to realize this is the second time SAIC gave way to Ma. The first time was in July 2014, when SAIC was ready to release its white paper and yet had to postpone it so as not to cause negative impact on Alibaba's effort to get listed in the US stock market.

And after a US law firm filed a class action complaint against Ma Yun. SAIC claimed that the white paper was nothing more than the minutes of an administrative guidance forum and was not legally binding.

As anyone knows, the Chinese government always gets its way; any other businesses understand this and if they receive evaluation like this from a state regulatory body, their only option would be to admit their faults and correct them. But not for Ma Yun’s Alibaba, a company that managed to make the SAIC postpone the release of the white paper and later retracted it.

This happened not because the SAIC is afraid of Ma. Instead, the regulatory body does not want to upset the company’s princelings stockholders. So, presumably, SAIC chief Zhang Mao decided the best option would be to make peace with Ma.

How hard would it be to fool US investors?

People said US investors won’t be fooled easily. This comment is true in a sense. The law firms that took part in a class action lawsuit against Alibaba included Pomerantz LLP, a well-known law firm specializing in shareholders’ rights. The law firm announced that it would conduct a probe targeting Alibaba and some of its management or members of its board of directors so as to find out if they did things that violated the Securities Act. Sounds quite serious.

However, when it comes to matters involving China, things in the US may play out differently. For instance, everyone knows that Americans won’t hesitate to criticize the government and the president; that they hate bribery; and that they have some opinions about power-money exchange and government-business collusion in China. Views as such are basically correct; yet when US rules come face to face with the Chinese disregard of rules, it seems that the Chinese almost always has an upper hand.

Initially, Alibaba planned to be listed in the US between July and August, but was forced to defer it because of a report ran by the New York Times on July 21.

When questioned about the background of his company, Ma Yun replied that the only background of Alibaba is the market and that people had over interpreted the identity of some of its shareholders. There’s nothing strange in Ma’s reply, what was odd, however, was why the SEC and the investment banking sector did not press further on this.

It could be said that Alibaba could get listed on September 19 in the US thanks to the “negligence” of the SEC and the help of the investment banking sector. By November 11, the market value of the company rose to 284.7 billion dollars, thus became the eighth largest stock listed in the New York Stock Exchange and surpassed Wells Fargo and General Electric.

It is true that US investors won’t be fooled easily by US companies. Yet when it comes to Chinese companies, it might be a different story. Before Alibaba was listed in the US, over 130 Chinese companies were suspended from stock trading and came under investigation for suspected financial fraud. However, the big four accounting firms involved were not punished accordingly as they refused to hand over documents as demanded by the SEC on the grounds that the laws of the PRC prohibited them from doing so. The Chinese government backed their claims. And now, after dragging on for years, the dispute between the SEC and the big four was settled.

At their zenith, the 130 China-concept stocks had a combined market value of 50 billion dollars; they were worth only 20 billion dollars in total when these companies’ stocks were suspended from trading or delisted, resulting in a loss of as high as 60%.

It is said that the law firms preparing to sue Alibaba had crucial evidence in their hands showing that the company is in fact a variable interest entity registered and incorporated in Cayman Island. It would mean disaster for the US stock market should Alibaba follow the footsteps of those 130 Chinese companies.

The foundation of a market economy is crediblity, something that China hardly possesses. In the past, the Chinese government used the country's laws as reason to refuse handing over documents about the financial data of Chinese companies listed in the US; and now, it made the SAIC become an accomplice of Alibaba in concealing information. Under this circumstance, I would suggest the US not to blame the cheaters but to find out why did it make things easy for Chinese enterprises and let them go straight into the US market when they cast the spell of “open sesame”.