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Curtis S Chin
Special to The Nation
NEW YORK October 22, 2014 1:00 am
Alibaba Group founder Jack Ma speaks after accepting the Asian Game Changer of the Year award at a ceremony hosted by the Asia Society at the United Nations in New York last week.
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The historic $25-billion listing of Alibaba should inspire magic words that bring a much-needed opening of China's financial marketsJust eight minutes after Chinese e-commerce firm Alibaba made history with a blockbuster initial public offering, equity markets in the United States hit a peak, and have been trending downward ever since. Volatility is back in markets from New York to London to Tokyo.
With the storyline from Asia no long simply a straightforward one of China's and Chinese companies' rise, it's worth pausing to reflect on the need for continued capital market reforms across the region, including in Southeast Asia, but particularly in China.
As my Milken Institute colleague Kevin Klowden and I have written, the debut of Alibaba marked an amazing confluence of expectations, opportunities and pent-up demand by investors still eager to find treasure in China, now the second-largest economy in the world (some say it is already the largest based on the latest International Monetary Fund data).
The Milken Institute is a California-headquartered non-partisan economic policy think tank focused in part on driving change through innovations in capital markets.
In the case of Alibaba, media and investors understandably focused on the size of the deal. Jack Ma, Alibaba's founder and executive chairman, who once struggled to raise a few thousand dollars to start a business in China, made history with the $25-billion listing in the United States last month. That IPO became the world's largest to date, topping the $20-billion-plus IPOs for both the Agricultural Bank of China in 2010 and ICBC, another Chinese bank, in 2006.
Yet, that the listing took place in the US - out of reach of the average investor in China where capital flows and its own citizens' investment opportunities are restricted - also speaks volumes about how much further China must go to liberalise its capital markets and ensure greater domestic access to capital to finance further innovation. That's a message also for Southeast Asia as the end-2015 launch of theAseanEconomic Community approaches. Capital market reforms can be a critical step forward in ensuring the ability of Southeast Asian nations to spur business and job creation.
Ma may well be one of a kind in China for now, but with the right policy environments he could well be one of many future Chinese entrepreneurs who become household names both in and outside their own country.
Steve Jobs, Bill Gates, Mark Zuckerberg, Pierre Omidyar and other technology pioneers succeeded in growing an idea and business amid an enabling US environment marked by rule of law and access to both domestic and international capital and financing. China would be wise to do the same and take steps to foster and finance future Jack Mas at home.
As for the Alibaba CEO and founder, his day's struggling to raise funds for a business launched out of his Hangzhou home are long past. His challenge now is not access to capital, but to live up to the rhetoric and promise described so well in a pre-offering roadshow that reportedly included some 100 investor presentations in 10 cities around the world. His success to date should also be a driver for change in his homeland.
So what next? The listing results have been blockbuster and dramatic as institutional investors, hedge funds, trading companies and others lined up for a piece of Alibaba. Even before the first sale, the company was valued at a very high 44 times earnings.
However, neither this nor a lack of transparency and a convoluted governance model - which prevented Alibaba Group's listing on the Hong Kong Stock Exchange - was enough to dissuade investors, who worried less about a tale of 40 thieves and focused more on riches that might lie ahead.
To paraphrase David Bonderman of TPG Capital at our first Milken Institute Asia Summit, which happened to take place in Singapore the week of the e-commerce company's listing, "Alibaba has probably the worst governance in the history of the world."
Demand though pushed up the stock nearly 40 per cent on its first day as investors bought the Alibaba story. The stock closed at more than $98 per share on its first day of trading. China regulators and indeed Ma's fellow citizens, including those cut off from investing outside of China, might well have looked on with mixed feelings as Jack Ma and Alibaba made financial history.
Though Alibaba's share price may well continue to fall and rise with the company's prospects in the months and years ahead and added scrutiny comes to Alibaba's governance and ownership structure, Ma should serve as an example for future entrepreneurs, whether in China, Southeast Asia or elsewhere in the region. Wealth and job creation can be achieved, even in China, with minimal government support. Ma turned to the US financial markets to finance Alibaba's expansion. China's challenge now is to show it can do the same.
Earlier this year, China's State Council indicated it would be moving forward on a number of financial reforms. These included making progress toward direct bond issuances by local governments, removing some limits on using financial derivatives, and streamlining the approval process for IPOs as well as increasing quotas for both inward and outward foreign investment.
As Bonderman added at the Milken Institute Asia Summit in Singapore, "Asian capital markets, if not in their infancy, are unruly teenagers".
Markets indeed have "to grow up". How fitting it would be if last month's successful Alibaba Group IPO also provided the magic words for a further opening of China's financial markets and a deepening of capital market reforms. Indeed, particularly in volatile economic times, the world needs more tales of "Open Sesame" - of opening and reforms - and not of poor governance, missing accountability and "40 Thieves".
CURTIS S CHIN, a former US Ambassador to the Asian Development Bank, is managing director of advisory firm RiverPeak Group, LLC, and this year became the first Asia Fellow at the Milken Institute. Follow him on Twitter at @CurtisSChin
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