Beijing’s Jack Ma Kabuki Play Continues… Is Alibaba A Value Play?
A year ago this week, Jack Ma was worth something like $50 billion, the richest man in China, the most famous man in China, a media star, cultural phenomenon. His first company – Alibaba – was worth well over $800 Billion (more than Facebook, or Warren Buffet’s Berkshire Hathaway). His second company – the Ant Group – was preparing to execute the largest public offering in history. The projected post-IPO value of Ant, combined with the value of Alibaba on the New York exchange, would have been more than twice as much as the four giant state banks of China put together. Jack Ma stood astride the Chinese financial industry.
Then, Beijing disappeared Jack Ma.
In recent English usage, “disappear” – which is normally an intransitive verb – has become a transitive verb, taking a direct object, a victim. Part A (usually a powerful and malignant government) disappears Party B (the victim). That is, Party B simply vanishes from public view, without evidence or explanation, but everyone knows that Party A is behind it. “Disappearing” someone is a supreme demonstration of Party A’s power.
Imagine then that the verb “appear” could also become transitive. Party A (the Chinese government) “appears” Party B (Jack Ma), teasingly pulling back the curtain for just a moment, offering us just a glimpse of Party B, only to disappear him again, in a puzzling and ominous cycle.
And so, Beijing has now “appeared” Jack Ma – very briefly – a few times, in settings that seem intended to emphasize the government’s arbitrary power over him. After they disappeared him in October 2020, Ma went missing for months. Then, inexplicably, the “appearings” began – Jack popped up here and there under strange circumstances and without any official explanation or corroboration… in a rural elementary school, on a golf course, in Hong Kong, in a text exchange with a Japanese investor, in a video with Vladimir Putin, and most recently now, on vacation (??) in… Spain. Of all places. On an “agricultural study tour.” Except that he is also said to be touring the Balearic Islands on his yacht. Investors have held their breath as this kabuki play has unfolded, hoping for the best, fearing the worst. (See my previous columns for details.)
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Meanwhile, Jack Ma Inc. has been brutally battered. The Ant Group is being dismembered and repurposed. Ma has been forced to bring in partners, including the State Banks and even corruption-ridden Huarong Asset Management (see this previous column). Valuations of Ant (still a private company, after its IPO was halted at the eleventh hour) range from about $100 billion to $144 billion — less than half of the projected IPO opening price, and probably a third or less of what Ant would have commanded had the roof not caved in. Alibaba is also worth just half what it was worth a year ago.
The destruction of value here is extraordinary. What did Jack Ma do to bring on this sort of bloodbath?
Jack Ma’s Sins
One year ago Jack Ma was a man in full. On October 24, 2020, he stepped up the podium at the Bund Finance Summit, in Shanghai (the “Bund” is the riverfront stretch of classic old Shanghai, now thoroughly modernized, a symbol of Shanghai’s status as a world-class city) to give a keynote speech to China’s financial industry elite, including the leaders of the traditional Chinese banking industry and their intertwined regulatory cousins – and he let them have it, with “both barrels” (as the saying goes).
I used to think that his speech could not have been the real cause of subsequent events (including his disappearance). But rereading the transcript now, reflecting on what he said and how he said it, and taking account of the pique that Xi Jinping has shown at much more inconsequential criticisms (Beijing has disappeared people for posting tweets comparing Xi to Winnie the Pooh, for example), I have changed my view.
A year later, I can see that it is more than just a provocation. It is a substantive critique of the regime. In it, Ma proclaims a revolution, a declaration of independence for New Finance in China (based on technology we are starting to call Fintech). It is a vision of a reformed financial system, which would shoulder aside the Chinese Communist Party (CCP).
The CCP’s economic mindset is antiquated (rooted in 19th century Marxist philosophy, precariously combined with outdated banking concepts – the “pawnshop mentality” Ma criticizes below), and quasi-religious (with Xi as the current apostle – with now 18 new Research Centers devoted to his “thought”).
Ma’s view is secular and modern. Here’s how he starts it:
- “This concept of Internet-powered finance must have three core elements: first, it must have rich data; second, it must have risk control technology based on rich big data; and third, it must have a credit-based system built on big data.”
No mention here of the class struggle, or the CCP and its interests.
His view of the incompetence of the regulators is barely veiled.
- “Jian [editor’s note: English word is “supervision”, the first character in the word for “regulation” in Chinese] and guan [editor’s note: English word is “management”, the second character in the word for “regulation” in Chinese] are two different things. … We are very good at “management”, but our “supervision” ability is sorely lacking.”
Management is presumably what Jack and his companies are good at. Supervision is what the regulators do.
- “Good innovation is not afraid of regulation, but is afraid of being subjected to yesterday’s way to regulate. We cannot use the way to manage a railway station to manage an airport. We cannot use yesterday’s way to manage the future.”
Talking about how to regulate the regulators, Ma can sound very much like aan American politician in the Republican party:
- “I came up with a solution called “plus one, minus three” – if you want to add a rule, you must subtract the previous three rules. If you don’t reduce the number of rules, then your rules and regulations will get thicker and thicker, which forces everyone to break a rule, to make a mistake, and we all get confused.”
He offers this visionary perspective:
- “The competition of the future is a competition of innovation, not a competition of regulatory skills. Now, each country’s regulation is more ruthless than the next, all the development is a mirage, but by not allowing it, each cut is bloody.”
Is it too much to read “innovation” as standing for free-market capitalism, and “regulatory skills” as representing the lumbering bureaucracy of state control?
That is certainly how it reads here in the U.S. “The competition of the future is innovation” – this is the ideology of Silicon Valley, not of Karl Marx. (Keep in mind that communism has always been suspicious of “innovation”; in Marx and Engel’s day, the innovative technology in the mills of Manchester (e.g.) was the force that was empowering the capitalists, and impoverishing and dehumanizing the working man.) Ma’s position here is openly antagonistic towards the orthodox communist model.
In the phrase most widely cited, Ma launched his intellectual j’accuse directly at the state bankers (and regulators, pretty much one and the same) sitting in his audience:
- “We must change the pawnshop mentality of today’s finance and rely on the development of a credit-based system. Today’s banks continue to have a pawnshop mentality.”
By “credit-based system” he was referring to the hugely successful Fintech engine that Alibaba and Ant had created almost overnight to bring modern financial services to the billion or so Chinese citizens that the State Banks don’t serve, can’t serve, and won’t serve. In short, he was calling for the overhaul (overthrow?) of the traditional banking system.
He further indicts the State Banks for creating the financial distortions that are plaguing China now (even more obviously in the year since, with the Evergrande catastrophe unfolding week by week):
- “Another habit: banks like to give loans companies that don’t need money. They desperately want to loan these companies money. The result is lots of good businesses become bad businesses. They diversify their investments, even transferring this money out to do things that are completely unsuitable for them. Too much money can get you into a lot of trouble.”
This diagnosis of the uncontrolled expansion of so many Chinese firms is spot on. Huarong, and Evergrande are cases in point. What sense did it make for Huarong (a bank) to expand into the coal mining business, or iron and steel production, or to invest in a Russian oil company? Or for Evergrande (a real estate developer) to diversify into manufacturing electric vehicles to attempt to compete with Tesla? The obsolete mindset of the State banks has distorted the capital allocation process in the Chinese economy to an extreme degree.
The coda of Ma’s speech is a forceful argument for digital currency – which must have been over the heads of many of his the traditionalists in the audience. Or perhaps they heard him clearly enough, but understand the implication: that a digital currency could be created by the most powerful private sector segment of Finance – namely Jack Ma Inc. – which of course would be politically intolerable for the CCP.
In the end, Jack was also was brought, in hubris perhaps, and unwisely, to brag:
- “Last night in Shanghai, we decided on the pricing of Ant’s IPO. This is the largest listing ever priced in the history of the entire human race, and the pricing happened in a place other than New York City. This was unthinkable five years ago, even three years ago, but miracles happen.”
Somewhere over that Halloween weekend last year, Beijing decided to cancel the miracle.
A Value Play?
At least Jack has been allowed to escape the worse fates that some of his fellow entrepreneurs have suffered. He is still alive, and apparently not in harsh custody – and that this happier-than-it-might-have-been outcome was no certainty, given the techniques of the CCP, is shown by the fact that a single photograph of Jack this month, in Spain, masked and perhaps relieved to be out on parole, was enough to add more than $20 billion of market value to Alibaba overnight. There have been several such relief bumps in the share price, correlated with these “appearings.”
Good for Jack, I’d say, if he can make it through this shadowy phase. I have the feeling he could outlast Xi Jinping (the Chinese maximum-leader is making too many blunders to project a long survivability in power).
And that may mean that Alibaba could be a great value play. If Jack survives this, as it begins to look like he will, the stock should recover. Warren Buffett may think so, too. His partner, Charlie Munger, has this month taken a big stake in Alibaba.
Could it be time to buy?