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Alibaba IPO Was Test of Whether U.S. Investors Will Take a Chance on the ‘New’ China

About 10 years ago, I led a two-week China business observation tour of McCombs Business School MBA candidates. One of our first stops was at the headquarters of Jack Ma’s Alibaba in Hangzhou, China.

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About 10 years ago, I led a two-week China business observation tour of McCombs Business School MBA candidates. One of our first stops was at the headquarters of Jack Ma’s Alibaba in Hangzhou, China.

We went to Hangzhou because we had heard that Jack had created an interesting Silicon Valley-like e-commerce company. Jack was a tall, rail thin, intense former English teacher with the personality of a new car salesman.

Alibaba was only 4 years old and had just moved into new, larger offices. Although the paint wasn’t dry, his offices were filled with flat tables covered by row after row of computer monitors. In front of the monitors were bright, intense young men and women wearing headsets.

They were making energetic, emotional phone pitches to Chinese business owners. Their message was urgent and simple.

“The Internet revolution is here. If your company doesn’t have a Web presence, you will miss out on the biggest economic revolution in your lifetime. You don’t have a minute to waste, because your competitors have already signed up with us. If you tell us yes, our team will get you on the Web within the month, and from then on, you can offer your wares to buyers everywhere in the world.”

Eleven years have passed. Alibaba is now a global Internet giant, even though the lion’s share of its revenue comes from China. Later this month, it is scheduled to have its initial public offering on the New York Stock Exchange. Alibaba’s IPO could be the largest in the history of the world. What we do know is that Alibaba’s IPO will make Jack Ma the richest man in China.

There are arguments for and against buying Alibaba’s stock. For the first time, American investors will have the opportunity to make a “pure play” investment into the amazing growth of China’s middle class. Every year, 30 million to 50 million Chinese join China’s exploding middle class. Since 1980, China’s middle class has grown to 500 million people. Their e-commerce platform of choice is Alibaba and its dizzying array of e-commerce websites.

There are real risks in buying Alibaba’s stock. Alibaba is a Chinese company. The idea of regulatory and business transparency is a foreign concept in China. When Xi Jinping became the president of China, he ordered every Chinese judge to swear allegiance to the Chinese Communist Party first and the rule of law second, so investors will have to “hope” that Alibaba’s financial statements are truthful. Hope, typically, is not a good strategy for investment.

When Alibaba shares started trading on the NYSE, the company had to comply with U.S. Securities and Exchange Commission rules. This will provide investors unprecedented insight into the operations of a Chinese multinational. But the words “subprime,” “too big to fail” and “Bernie Madoff” are chilling reminders of the limits of our regulatory system.

Today, about 80 percent of the stock of most publicly traded companies in China is owned by the Chinese government. Some fear that the Chinese government could dump millions of shares on the market and drive down the value of everyone’s shares. Others think that it is in the economic and political interest of the leaders of the Chinese Communist Party to be capitalists and maximize the value of the stock that government owns.

I believe that the Chinese Communist Party wants Alibaba’s IPO to become a symbol of the “new” China. I believe that they will give Jack Ma and Alibaba unprecedented freedom to comply with SEC regulations. They know that if American investors get comfortable with buying the stock of a Chinese company, that will open the floodgates to other Chinese IPOs on the NYSE, Nasdaq and other American and European exchanges.

Today, China is the largest mixed economy in the world. Its inexorable move toward capitalism cannot be stopped.

For that reason, and what I saw in Jack Ma’s eyes in 2003, when Alibaba’s stock went public, I knew it could meet the expectation of being one of the largest in history.

John Doggett is a senior lecturer of management in the McCombs School of Business at The University of Texas At Austin.

A version of this op-ed appeared in the Austin American Statesman.


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