Jack Ma is retiring. Is China’s economy losing steam? – Yasheng Huang

MIT Sloan Professor Yasheng Huang

MIT Sloan Professor Yasheng Huang

From New York Times 

GUANGZHOU, China — Earlier this month, Jack Ma announced that he was stepping down as executive chairman of Alibaba Group Holding Ltd, the world’s largest e-commerce company. His decision caught many by surprise. At an economic forum in Russia, President Vladimir V. Putin reportedly asked him, “You are still so young. Why are you retiring?”

Maybe Mr. Ma, 54, knows something that Mr. Putin does not. Two of the three forces, globalization and marketization, that have propelled Alibaba to its current $500 billion valuation are dissipating. The third force, technology, is mired in the trade war between China and the United States, and its prospects in China are now uncertain.

Alibaba didn’t just transform e-commerce in China; it transformed the entire economy by helping build up the private sector. Mr. Ma’s departure from the company now — though he claims to have been planning it for a while — adds to a gathering sense that China’s private sector, the engine of the economy, is losing steam — and faith.

Alibaba is China’s globalization story par excellenceFounded in 1999, the company created a website that allowed people outside China to buy directly from Chinese exporters. At that time, China was opening up but foreign buyers were hampered by their lack of knowledge of Chinese suppliers. Alibaba set up a program called TrustPass, allowing third parties to verify the quality and trustworthiness of Chinese suppliers. This system enabled foreign buyers to bypass the slow and often bureaucratic state-owned intermediaries that typically performed verification, and it eased Chinese companies’ access to the global marketplace.

Alibaba also tapped international capital markets. The company’s founders hailed from modest backgrounds and had little capital, but they benefited from liberal policies that China had put in place as it was negotiating to join the World Trade Organization (which it did join, in 2001). During the company’s early years, its leaders turned to foreign suppliers of capital, such as Goldman Sachs, SoftBank and Fidelity Investments. Later on, Yahoo also provided funding.

In the early 2000s, Alibaba structured its investment arrangements via what are known as “variable interest entities.” V.I.E.s are intermediary structures in which foreign firms can invest to acquire contractual rights over revenues generated by Alibaba. They were an innovative solution to help foreigners navigate China’s murky legal system while bringing critical financing to Chinese high-tech entrepreneurs.

But today globalization is under assault. The Chinese government is enforcing more strictly regulations over V.I.E.s that it had long ignored, creating uncertainty for foreign investors. And the trade war between the United States and China is disrupting Chinese exports, threatening the supply chains of which Alibaba is an integral component.

Alibaba has elevated China’s private entrepreneurs in another way: by providing direct financing to them. China has a massive banking system, but it is almost entirely organized to support the less efficient state-owned enterprises, leaving China’s dynamic private sector chronically short of capital and credit. Alibaba, through its financing operations, has stepped in to provide much-needed capital, especially to China’s very small businesses.

Read the full post at New York Times.

Yasheng Huang is the International Program Professor in Chinese Economy and Business and a Professor of Global Economics and Management at the MIT Sloan School of Management. 

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From TED

MIT Sloan Prof. Yasheng Huang compares China to India, and asks how China’s authoritarian rule contributed to its astonishing economic growth — leading to a big question: Is democracy actually holding India back? Huang’s answer may surprise you.

Yasheng Huang asks us to rethink our ideas about China and other large emerging economies. Lately he’s been asking, Does democracy hinder or promote economic growth? Full bio »

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