Alibaba's Woes in China Could Spread to the U.S.

In China, the land of the Great Firewall, local Internet companies are supposed to enjoy a home-field advantage. The Communist Party leadership is notoriously wary about the ability of ordinary Chinese to speak their minds, look at naughty pictures, or engage in other online behavior that makes censors jittery—and foreign-owned companies make officials especially nervous. Google, for instance, won't play by China's censorship rules. Local search giant Baidu, on the other hand, will.

The Chinese government's interest in promoting local companies is one reason its current battle with Alibaba—China's most powerful Internet business—has given investors such a shock. Accusing Alibaba Group of allowing the sale of frauds and knockoffs on its online marketplace, China's State Administration for Industry and Commerce this week said billionaire Jack Ma's company "faces its biggest credibility crisis since its establishment." In a particularly damaging accusation, given Chinese President Xi Jinping's high-profile campaign against corruption, the SAIC also accused Alibaba employees of taking bribes.