Alibaba, Weibo and China’s potential for growth

April 10, 2014

In recent weeks, there has been a surge in Chinese tech sector IPOs — including Alibaba, Weibo and — all planning to list on American exchanges. They’re smart to list away from home: doing so will give them access to more liquidity, and allow them to avoid certain restrictions — like the rule that companies cannot IPO in China if they haven’t yet turned a profit.

There are also compelling reasons for global investors to get excited about these offerings. China’s domestic consumer market is rapidly growing, and e-commerce is perhaps the most robust segment. There were over 6 billion parcels delivered in China in the first nine months of 2013 — up a staggering 61.2 percent from the same period a year prior. Online shoppers received half of those packages.

President Xi Jinping’s reforms are ambitious and unprecedented, and seek to transform the Chinese economy from a state-stimulated growth engine to a digital age, middle-class, consumer-driven economy in a country of more than 1.3 billion people. If these economic reforms succeed, they will unlock huge opportunities for tech companies that benefit from rising domestic consumption and a growing middle-class that has embraced the Internet.

Yet warning signs surrounding the economic reforms are giving potential investors pause. Recently, we’ve seen wealthy Chinese leaving China. Key leaders are concerned that Xi’s anti-corruption campaign is going too far, threatening to create fissures among powerful political factions. And investors are worried that faltering economic growth —  a “new normal” of 7 percent growth, rather than the 10 percent or more of past years — will force China’s leadership to return to traditional stimulus measures, instead of continuing with the current pace of reform.

However, in all of these instances, there is reason to believe that the economic reform agenda will remain on track. Let’s start with the diaspora of Chinese elite. In a recent survey of China’s wealthiest citizens (defined as having a net worth above $1.6 million), 64 percent said they have already left the country or are planning to leave, up from 60 percent in 2013. This exodus is a sign of successful economic reform, because opening the economy and fighting corruption will threaten the vested interests of many of China’s super rich, prompting some of them to safeguard their fortunes overseas.

It’s telling that China’s wealthy are bullish about the economy, even as they find themselves more likely to leave. For the first time in five years, more of China’s rich are extremely confident about their country’s economy than they were the year before.

Within other circles of power, Xi Jinping’s anti-corruption campaign might trigger backlash that could slow or halt the economic reform process. Former President Jiang Zemin recently announced that “the footprint of this anti-corruption campaign cannot get too big.” Hu Jintao, Xi’s presidential predecessor, echoed these concerns, warning that the campaign shouldn’t go too far.

But in a promising sign, Xi Jinping pushed against powerful elites for a year before they began to oppose him. His anti-corruption campaign is more than cosmetic: it’s having a real impact, and these political consolidations go hand in hand with his administration’s ability to push for more open economic and social policies.

China’s waning economic growth has investors bracing for Chinese leadership to revert to the old model of state-driven stimulus measures, jeopardizing Xi’s vision for a digital age economy based on domestic consumption. But Xi remains committed to the reform agenda, and has shown a willingness to trade some state-driven economic growth in exchange for reform.

Where we do see state stimulus in the near future, it will largely be geared toward supporting the reform agenda. For example, as domestic investment slows, Beijing will likely allow new private and foreign investment in sectors of the economy that were traditionally off-limits — look for more foreign involvement in the Shanghai Free Trade Zone, for example.

Beijing will also prioritize spending on industries, like energy efficiency and advanced IT, that are associated with this new phase of growth. It will cut back on bloated sectors, like steel and aluminum, that are more aligned with the old industrial-heavy model of state spending.

Over the long term, China’s road to economic reform will be bumpy and politically unpredictable. Its state capitalist model will remain the dominant economic force for the foreseeable future. A more acute economic slowdown could undermine Xi’s reform agenda. Criticism from political elites, their influence waning, will grow louder — and perhaps too ear-splitting for reforms to be sustainable.

China’s economic trajectory remains an open question: given the size of China’s economy, the answer to that question is quite possibly the single biggest determinant of where the global economy is heading.

But today, despite the warning signs, Xi Jinping still believes that the best defense against political pushback is a good offense, and that when it comes to reform, the most viable path forward is success rather than compromise. For investors and companies who stand to benefit from a consumer-driven Chinese economy, it could pay to share Xi’s optimism.

PHOTOS: Alan Guo (C), CEO of Light In The Box, Ltd., and other company executives watch as their company begins trading on the floor at the New York Stock Exchange, June 6, 2013. REUTERS/Brendan McDermid

Chinese consumers crowd the newly opened Wal-Mart store in Shanghai July 28, 2005. REUTERS/Ming Ming RKR/PN


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China’s even greater dependence on fossil energy will always limit their potential. They seem oblivious to this, the limits of availability, and oblivious to the health issues their supposed better workers will face. I suspect they will be rather constrained, as Japan is, unless they find an alternative path. However, they seem more imitators of us rather than competitors. I suspect they look at our obsession with oil resources and assume that must be the path, and they don’t understand that is a remnant of our colonial past and our imitation of great britains colonial empire. However, wars for money and oil have bleed tax payers all over the world about as far as they can. It’s true that as the oil becomes more scarce, it becomes more valuable and profitable, yet at some point it’s too expensive to compete with alternatives. The nation that sees the future and invest in the right alternatives will lead and all others will follow. I doubt it will be the US since the people have been so brainwashed and our politics so corrupted. Plus, we like the wars and the bloodshed and suffering, it all seems so biblical.

Posted by brotherkenny4 | Report as abusive

Never trust a commie!

Posted by UauS | Report as abusive