Alibaba IPO shows progress, shortcomings in China

With the ding of a bell, Chinese tech mogul Jack Ma became the richest man in China. (Photo: Andrew Burton, Getty Images)

Alibaba, an online marketplace company based out of Hangzhou, China, held the largest initial public offering (IPO) in history, netting $25 billion on Wall Street on September 19. This is a promising step for the world’s most populated nation as it attempts to continue its rapid growth trend. Yet at the same time, it demonstrates how the Chinese government’s continued overbearing regulatory system is hindering capital inflows to China and its economic development as a whole.

Alibaba founder Jack Ma’s entrepreneurial spirit goes back 15 years. In July 1999, he gave a rousing speech to his employees when Alibaba was still a fledgling startup. He told his employees that working a traditional eight hour day wouldn’t cut it – they would have to outwork Silicon Valley if they were to be a successful high-tech company. He even wanted the company to IPO in 2002, just three years later, but correctly predicted that the dot-com bubble would burst and the goal was overly optimistic.

This work ethic and willingness to compete on a global scale may not have been common in China at the time, but it has quickly become the norm in a country with rapid development and a considerable trade surplus. Alibaba has led this trend, becoming a top-25 website in China and becoming what has been compared to being a hybrid of Amazon, eBay, Craigslist, and other popular American shopping websites.

In an episode of The Daily Show, host Jon Stewart realizes that the Alibaba shares he’s pretending to buy are actually for a company that is incorporated in the Cayman Islands to avoid corporate taxes. (Photo: The Daily Show, Comedy Central)

Although Alibaba’s rise is considerable for a Chinese company, its record-breaking IPO may be a sign of irrational exuberance on Wall Street. Alibaba’s status on the web in China may be respectable, but Alibaba is only ranked number 63 in the world for website traffic according to Alexa, while Chinese search engine Baidu is the top website in China and in the top 5 worldwide. Yet Alibaba has outpaced Baidu in the financial world, having amassed a $220 billion market cap just one week post-IPO compared to Baidu’s $76 billion market cap over nine years after its IPO. With other tech companies like Snapchat being valued at $10 billion despite having no revenue, the bursting of the tech bubble might be overdue.

Another key point is why Alibaba had its IPO on Wall Street and not in China, where Hong Kong is another major world financial hub. The answer was provided rather humorously by Jon Stewart, who noted that Alibaba felt that it wouldn’t be able to comply with Hong Kong’s stringent management and corporate governance structures required to be listed on the stock exchange there. But the IPO in New York was just one facet of the story. The Alibaba shares that generated over $200 billion were not actually for Alibaba directly, but for Alibaba Group Holding Ltd., incorporated in the Cayman Islands, a British island territory south of Cuba which is known as a tax haven.

The Alibaba IPO is thus a case in point for why state interference in the modern global economy is becoming increasingly counterproductive. Hong Kong’s financial regulations and the high corporate income taxes in China (25%) and the United States (40%) led Alibaba to incorporate in the Cayman Islands, where there is no corporate income tax.

While “tax the rich” and a general anti-corporation attitude may have gained popularity since the rise of Occupy Wall Street, these policies have the opposite effect, sending billions of dollars away from the places where it was earned and to countries that simply have a more laissez-faire economic policy. Both China and the United States can learn lessons from this IPO and ensure that the fruits of their hard working and innovative citizens’ labor stay in their own countries.

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