Alibaba's Listing Upgrade The Lift Hong Kong Needs

The timing is as fraught with opportunity as risk. In 2023, China's biggest e-commerce player had one of the most chaotic years in its 25-year history. Even by the standards of 2020, when President Xi's government clamped down on internet companies .

In March 2023, Alibaba split into six units to recalibrate and refocus its core businesses: domestic e-tailing, international e-commerce, cloud computing, local services, logistics, and media and entertainment.

At the time, the cash-cow domestic e-commerce group, which includes the Taobao marketplace, aimed to remain a wholly-owned unit. The five others are run by different CEOs, each of whom can pursue separate public listings.

As then-Alibaba CEO Daniel Zhang put it 17 months ago:“The market is the best litmus test, and each business group and company can pursue independent fundraising and IPOs when they are ready.”

The enterprise was bigger than Alibaba, though. It was a case study of sorts for China Inc as Xi's regulators seek to head off risks and curb monopolistic tendencies among tech giants.

It's quite a balancing act, considering that Xi and Premier Li Qiang want private companies to take the lead in creating jobs and boosting a troubled economy.

Ma's Alibaba was an obvious place to start. It's long been a global symbol of China's tech aspirations and a weathervane of Beijing's tolerance of tech billionaires spreading their wings.

Nowhere was that tension more on display than in October 2020. After Ma criticized China's financial regulators for stifling innovation, authorities canceled a $35 billion IPO planned by Ma's fintech unit Ant Group .

Alibaba's efforts to remake itself remain a work in progress. Last year, the e-commerce titan disappointed investors as profits dropped and revenue growth was a weaker-than-expected 4% in the second quarter.

The weak performance highlights two big problems that Chairman Joseph Tsai and CEO Eddie Wu - who replaced Zhang last September - have yet to reconcile. One is intensifying competition from rivals such as JD, Temu-owner PDD Holdings and others.

“Competition will remain a key issue for Alibaba,” says Shawn Yang, an analyst at Arete Research.“Some investors may have high hopes for the increase of Alibaba's take rate, as it began testing a new advertising tool this past quarter. But the actual numbers we are seeing in the results show it may take longer for that effort to pay off.”

The other is a lethargic Chinese economy, hobbled by weak consumption and compounded by a cratering property sector, that Team Xi has yet to reinvigorate. In July, Chinese consumers deposited less money in the bank but also didn't spend more. Some worry it's a poor omen for economic growth for the rest of 2024.

“The year-on-year decrease in excess savings growth has not yet translated into increased consumption,” says Tommy Xie, head of Greater China research at OCBC Bank.“This may be related to households deleveraging by repaying loans early and shifting deposits to wealth management products.”

That deleveraging matters to Alibaba's bottom line. Team Ma, after all, created an amalgam of Amazon, PayPal, eBay, travel agencies, brokerage services and real estate, thrusting his interests into virtually every sector imaginable to reach China's 1 billion-plus internet users.

This arguably makes Alibaba's quarterly performance a better gauge of China's economic health than gross domestic product (GDP) reports. And nothing would boost Alibaba shares faster than Xi's reform team increasing consumer spending.

“Weak growth is likely to lead to more PBOC easing, and given interest rates remain low and risk appetite for domestic assets is still limited, there is still a level of capital outflow pressure,” says Lynn Song, chief economist for Greater China at ING Bank.

By the broadest measure, China's budget expenditures are contracting at a moment when local government land sales are dropping at a record pace. Many economists think this will put greater pressure on Xi and Li to act more boldly to stabilize China's US$17 trillion economy .

The hope is that policies flowing out of last month's Third Plenum extravaganza will prioritize boosting consumer spending. So far, such moves have been in short supply.

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Economist Zhang Ming argues that Beijing should double or triple this year's special sovereign bonds to as much as 3 trillion yuan (US$420 billion) to finance growth and stimulate consumer spending.

“If we adhere to the central budget deficit level of 3% no matter what it takes, fiscal spending will inevitably contract and become pro-cyclical,” says Zhang, deputy director of the Institute of Finance & Banking at the Chinese Academy of Social Sciences, a government think tank.

Chenjie Liu, chairman of Upright Asset Management, notes that“raising the fiscal deficit ratio is an appropriate and effective policy tool.”

Economist Lisheng Wang at Goldman Sachs adds that“we see significant downward pressure for fiscal funding this year from falling tax and land sales revenue, besides the multi-year” deleveraging by state-owned companies known as local government financing vehicles, or LGFVs. The hope is to reduce China's exposure to off-balance-sheet debt risks.

Progress toward achieving China's 5% growth target would make Alibaba's path to 2025 considerably easier and lure more investors into going long on Alibaba shares.

As of now, analyst Laura Wang at Morgan Stanley says“we expect some inflows but not major,” at about US$12 billion in the first six months after inclusion, or about 7% of Alibaba's total outstanding shares.

The good news is that Alibaba's big push into cloud computing is bearing fruit. The unit showed modest growth of 5.9%, a product of CEO Wu's strategic overhaul of cloud computing and artificial intelligence . That helped offset a 1% drop in revenue from Alibaba's core platforms Taobao and Tmall.

But given Alibaba's unique place on the frontlines of China's GDP zigs and zags, any progress Beijing makes in hastening economic growth would do wonders for its appeal with global investors. Perhaps even for Hong Kong's appeal, too.

Follow William Pesek on X at @WilliamPesek

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