Letter originally published in the Financial Times
China already controls internet giants – and investors were warned
Sir, Jamil Anderlini, in “ Enduring suspicion weighs on capitalist in China” (March 1), is spot on in identifying the risks facing China’s capitalists, including that their companies may be taken over by the state. He writes that “internet groups, Alibaba, Tencent and Baidu are not only hugely profitable but also control the data that are the lifeblood of the modern economy. That is why Alibaba founder Jack Ma has repeatedly said that he would gladly hand his company over to the state if Beijing ever asked him to. Investors in New York-listed BABA can only hope it never comes to that.”
Unfortunately, it won’t need to “come to that”. It’s already much worse. All three of those companies, which have a combined market capitalisation of almost $1.2tn in New York, are active in value-added internet services, which is specifically prohibited for foreign investment under PRC regulations.
These contacts are invalid under the PRC Contract Law
The investment bankers got around the problem by constructing variable interest entities to hold the PRC-based operations, which rely for control not on ownership but instead on contracts; but these contacts are clearly invalid under Article 52 of the PRC Contract Law. Thus the Chinese government has no need to take any action; it already controls these companies. Meanwhile, the investment community, which was informed about these facts in each of the three initial public offering prospectuses, just turns the other way and hopes that these giants are too big to fail; but we all know what happened to Lehman Brothers.
March 7, 2018