Trends looking downward.

Photographer: ChinaFotoPress

Alibaba Can't Escape China's Rout

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Jack Ma, executive chairman of Alibaba, clearly takes pride in the fact his company trades on New York stock exchanges. But he hasn't been able to escape the ongoing stock market rout in China.  

As China's stocks plunge, traders have been rushing to cut ties with the country, and Alibaba, the New York stock exchange's biggest bet on Chinese consumers, hasn't been spared. The company's biggest selling point -- its access to Chinese shoppers -- has suddenly become its biggest vulnerability. On Tuesday, its stock slid to its lowest price since its IPO.

And there's little reason to expect Alibaba's fortunes will improve anytime soon. Even if the stock rout doesn't crash China's economy, it will likely reduce President Xi Jinping's appetite for sweeping economic reform.

That shift threatens Alibaba more than Ma would ever publicly admit. In a series of New York speeches last month, Ma detailed his company's vast ambitions for global growth. They included expanding warehousing investments in the West -- in ways that must have worried executives at Amazon.com -- and helping American startups "go to China and sell their products to China." 

To succeed outside China, though, Ma first needs a vibrant home market. And that depends on Xi having the courage to accelerate efforts to transform China into a service economy led by a thriving private sector.  Xi would have to diversify the country's growth engines, not just re-open its credit floodgates.

But China's economy is dominated by giant state-owned enterprises whose political connections make change hard in the best of times. With shares plunging, those monopolies' resistance to any reduction of their influence will only intensify. Xi's team will likely have less leeway to internationalize the country's financial system, free its interest rates and liberalize currency trading. Beijing might now "take a more cautious approach regarding capital account opening, given that too rapid an opening may further amplify domestic fluctuations, especially given fragile fundamentals and flawed regulations," says economist Tao Wang of UBS.

China's plunging stocks will also have an impact on Xi's efforts to make China the linchpin of a new global order. Beijing hinted at its ambitions this year by unveiling plans for a $100 billion Asian Infrastructure Investment Bank, a $40 billion effort to recreate the Silk Road and as much as $1.25 trillion of outbound investments over the next 10 years. The idea, of course, is to supplant the U.S.'s outsized influence over the global economy. But how is China supposed to remake global economic rules that are decades in the making when it has shown it can't run a simple stock market at home?

When you engineer a rally using state media, public funds and every regulatory gimmick you can think of, you're not operating a market so much as a rigged casino, one where the house wants everyone to win. And unsurprisingly, that strategy can't hold up. Even when 1,323 companies abruptly stopped trading shares on Wednesday, it couldn't stop the Shanghai Composite Index from falling another 5.9 percent. With losses in China equating to 15 times Greece’s gross domestic product, global markets should be paying attention.

Where things go from yesterday's 3507.19 close is anyone's guess. Researcher Michael Every at Rabobank Group says the market is heading to 2,500, while Kinger Lau of Goldman Sachs, pointing to the large-cap CSI 300 Index's 27 percent rally over the next 12 months, thinks China is due for a rebound. But the real issue is where China's reformers go in the weeks and months ahead. Do they give up or make a bold bid to strengthen the country's economic fundamentals?

The ongoing firesale in Shanghai demonstrates how flimsy the foundations for the stock rally had been. They're so flimsy, in fact, that magnates like Ma who thought they'd left China are now getting pulled back in.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Willie Pesek at wpesek@bloomberg.net

To contact the editor on this story:
Cameron Abadi at cabadi2@bloomberg.net