China’s economy is sweating, how is Alibaba’s CEO so relaxed?

China’s economy is sweating, how is Alibaba’s CEO so relaxed?

  • Alibaba’s CEO calmly played down the risks of trade war between China and US

  • China wants its consumers to spend more as global demand for the country’s good wanes

  • Any stimulus to boost consumption in China will benefit Alibaba first
The entire world is stressing about the unfolding trade war between China and US. But one man, Daniel Zhang -- the chief executive officer of online retailing giant Alibaba -- seemed rather unfazed by the clashing of the world’s two largest economies.

“Trade war is only one matter,” an impassive Zhang told delegates at the World Economic Forum, adding that a country of over a billion consumers is a ‘self-sufficient’ market.

In other words, China can reduce the reliance on Donald Trump’s US if it can get its consumers richer, more excited and prod them to splurge. “If there is purchasing power in China, then US and Europe don’t matter,” Zhang said on January 24.

The $450 billion Alibaba enjoys a near monopoly in China’s online retail and any improvement in consumption will benefit the company first, before it trickles down to other parts of the economy.

China had tried capital investments funded by debt in the aftermath of the global financial crisis a decade. It mined more coal but there were no takers, built new mills that made steel but couldn’t sell it, and developed properties that became ghost towns where only a few people lived.

The fall in prices from excess capacity and production kept a lid on overall economic growth, and on the other hand, debt kept piling up as the government spent more money to revive the economy every time it slowed down.

Now, China is taking a different approach -- consumers. And that bodes well for Alibaba. What's more, China is reportedly set to overtake America as the world's largest retail market in 2019. The stakes are high in China, if the consumers are willing to spend.

Open sesame

China has strategically blocked foreign sites like Google and Facebook over the last decade and the crackdown isn't complete yet. On January 24, a Microsoft spokesperson told Gizmodo in a statement by email that it has “confirmed that Bing is currently inaccessible in China and [is] engaged to determine next steps.”

Instead, the Chinese government made space for a bunch of home-grown technology companies that have thrived in the absence of foreign competition.

Alibaba, for instance, has grown by leaps and bounds in China -- and its market value in US jumped more than twice to nearly $400 billion -- in the last four years. On the other hand, American counterpart Amazon whose stock is worth $800 billion today, has a measly 2% share in China's booming online retail market.

Now, the lines between the state and private enterprise have increasingly blurred in China. In November 2018, Alibaba’s founder Jack Ma sold all his stake in the company and joined the Communist Party of China.

“We’re seeing an increasingly close relationship between China’s leading internet companies and government because government sees them as one of the most effective ways to realise its policy initiatives,” Mark Natkin managing director of Beijing-based Marbridge Consulting told the Fortune last year.

The benevolent enabler is now seeking his pound of flesh. “Communist Party committees have been installed at many tech firms, reviewing everything from operations to compliance with national goals. Regulators have been discussing taking a 1% stake in some giants, including Alibaba and Tencent, along with a board seat,” Bloomberg reported in April 2018.

In the case of Alibaba, the company seems to share a common interest with President Xi Jinping, now more than ever before. The economy just clocked its slowest quarterly growth since 1990. The country’s stock markets had their worst year in a decade in 2018. And property prices are crashing.

As the world braces for a slower 2019, all hopes of the Chinese establishment are pinned on the people of the country loosening their purse strings. And to prod them, the government will have to put money in the hands of consumers, in various ways including tax cuts. And when the millions of Chinese people spend the spare change, a sizeable chunk of it will pass through Alibaba.

See also:
Here's why Apple’s problem that began in China may spill over to India too