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 excellence. Founded 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.
But Alibaba is operating against broader political and economic headwinds, and China is now reducing the indebtedness of its economy, mostly by cutting credit to the private sector. As a result, according to one analysis in The Wall Street Journal, interest burdens on private companies have risen, whereas they have fallen for state-owned enterprises (and returns on assets, a measure of profitability, have fallen for private companies while rising for S.O.E.s).
The government, fearing the instability of shadow banking, is also stepping up controls on independent funding channels. For example, it has tightened regulations on some forms of mobile payment, like those operated by Alibaba. Such financial controls are likely to increase in the future.
Under increasingly tight financial and regulatory pressures, China’s private sector today arguably is facing the most challenging environment since the early 1990s.
According to the chief economist of China Merchant Bank, all 11,000 businesses that went bankrupt between 2016 and the first half of 2018 were private. After liberalizing the economy for nearly four decades, the government appears to be reversing course. By one count, 10 privately owned groups have in effect been nationalized this year, when, strapped for financing because of tightening credit controls, they sold their equity stakes to S.O.E.s.
The Chinese government even seems openly hostile toward the private sector. A vice-minister of the Ministry of Human Resources and Social Security recently said that private enterprises should be “jointly” run by private entrepreneurs and workers. The comment smacked of Mao Zedong’s justification for nationalizing China’s private sector in the mid-1950s.
In a recent blog post, one Wu Xiaoping, who identified himself as a “veteran in China’s financial sector,” argued that China’s private sector, having helped “the state-owned economy in achieving its rapid development,” should not “blindly expand” but instead embrace mixed ownership. The essay caused widespread consternation — even a degree of panic — among Chinese entrepreneurs.
In conversations I had in Guangdong, business leaders from various sectors — product design, investment, technology — called the current situation “dire.” They said they were making far fewer deals, as much as 50 percent less, now than during the same period last year and complained about the toll of increasing taxes.
The third leg of Alibaba’s growth, technology, is also shakier now than when the company was founded. Technology itself continues to develop rapidly, but both the United States and China want to go it alone. The Trump administration is limiting Chinese investments in American technology. The Chinese government’s “Made in China 2025” initiative, a vast program to develop advanced manufacturing, curbs foreign participation with equity restrictions and onerous requirements about technology transfer.
These are not the conditions that allowed Alibaba to succeed. The company was a pioneer in adopting Western technology and business models — using online commerce, data analytics, website tools — to the Chinese context. Although it is often called China’s Amazon, the comparison vastly understates its true significance. Alibaba started out as a business-to-business operation but, really, it gave market opportunities to private entrepreneurs in a statist system heavily stacked against them.
Many of these entrepreneurs are located in remote rural regions, and China has a highly uneven distribution of income and production. Income is concentrated in a few metropolitan centers, whereas production is distributed throughout the country. Alibaba connects production in these disparate regions to the sources of market demand and consumption. The links it provides aren’t just technological; they are broadly economic.
So why is the Chinese government clamping down on the private sector when liberalizing it has served the economy so well? The reasons are varied and complex: rising authoritarianism at home, statism, the trade war. But the effects already are clear, with ominous implications for the entire economy. Could there even be a new Alibaba today?
Yasheng Huang is a professor of international management at the Sloan School of Management at the Massachusetts Institute of Technology.