Alibaba Clash Spotlights China Political Risk for Business

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How serious are Alibaba Group Holding Ltd.’s problems with the Chinese government going to get?

In an unusually public dispute this week, Alibaba and a Chinese regulatory agency clashed over business practices and ethics. The State Administration for Industry and Commerce accused Alibaba of failing to crack down on shady merchants, bribery and fake goods, charges the company has rebutted. Co-founder Joe Tsai even opened an earnings call Thursday with a full-on barrage at the regulator, saying he was “deeply troubled” by its actions.

If the clash is just with one agency, then Alibaba and Chairman Jack Ma may emerge relatively unscathed, at little or no financial cost. If the squabble is part of a broader dispute with the government, however, even China’s most valuable Internet company will probably end up paying a price. It’s a sign of the current political risk in China for foreign and local companies.

“You’ve got to be more careful in China than ever before,” said Rebecca Palser, head of Risk Advisory Group in Hong Kong. “The rules -- if there were any -- are changing. The playing field is not what it used to be.”

President Xi Jinping has supported an active state role in the economy since taking office two years ago. He has waged the most serious crackdown on corruption in decades, prosecuting business leaders and government officials, while government agencies have targeted foreign and domestic companies for high prices and poor quality.

Ma has become perhaps the highest-profile figure in the private sector following Alibaba’s initial public offering, which has made him the country’s richest man at about $27.6 billion. He has also been outspoken, criticizing the country’s pollution and its inefficient financial sector.

Fake Cigarettes

The current dispute began last week when SAIC released a report on China’s e-commerce industry, saying it found websites that sold fake cigarettes, wine and handbags. This week, Alibaba through one of its official Weibo accounts said government inspectors applied standards inconsistently and didn’t give merchants enough time to respond to accusations. The post was written as a letter to SAIC’s Internet regulation director, Liu Hongliang, and said he wasn’t treating China’s biggest e-commerce operator fairly.

The next day, SAIC put out its report on Alibaba in which it said the company faces “the biggest credibility crisis since its establishment.” The agency said it met Alibaba in July, but didn’t publish its report until now to avoid affecting Alibaba’s record-breaking $25 billion IPO.

Alibaba’s Taobao Marketplace then said it would file a complaint against Liu for his actions. It’s highly unusual for a company to challenge the government in a country where the state holds sway over regulation, the finance sector and the Internet.

During the Thursday conference call, Tsai, who’s Ma’s right-hand man, came out swinging against the report.

“We believe the flawed approach taken in the report, and the tactic of releasing a so-called ‘white paper’ specifically targeting us, was so unfair that we felt compelled to take the extraordinary step of preparing a formal complaint to the SAIC,” Tsai said.

Toe the Line

“In my view, this is the officials saying, ‘You have to the toe the line’,” said Steve Vickers, a political risk consultant in Hong Kong. “It’s unlikely to be just a one off from an official.”

The spat comes after investors have been reminded of the political risks of operating in the Chinese political system.

The Chinese real estate developer Kaisa Group Holdings Ltd. missed an interest payment earlier this month after the government of Shenzhen blocked approvals of its property sales and new projects in the city. That has put Kaisa at risk of becoming the first Chinese real estate company to default on dollar-denominated bonds.

Credit Suisse Group AG has been caught in the crossfire this month after the chairman of its Chinese joint venture disappeared amid a government investigation. The partner, Peking University Founder Group, a state-owned conglomerate affiliated with the elite university, is embroiled in a fight with a billionaire developer for control of a separate securities firm that has involved reports of death threats and police raids.

Monopoly Probes

Carmakers such as Daimler AG’s Mercedes-Benz and Bayerische Motoren Werke AG have been probed over the prices they charge for spare parts. China imposed a fine of almost $500 million on GlaxoSmithKline Plc last year after a bribery investigation, while chipmaker Qualcomm Inc. faces an anti-monopoly probe.

Alibaba has been seen as having a strong relationship with the Chinese government. The company has created thousands of jobs, bolstered small businesses across the country and helped foster a more prominent role for consumers in the economy, a shift the central government supports. Ma appeared at the World Economic Forum in Davos, Switzerland as part of the official delegation led by Premier Li Keqiang.

Palser of the Risk Advisory Group is watching for the next development to help determine how the Alibaba drama will unfold.

“The back and forth does seem peculiar, the fact they did it publicly,” she said. “I’m still watching to see what’s going on. There’s certainly more than meets the eye.”