Alibaba’s Stock Market Quest; Why the Chinese Internet company won’t list in Shanghai

September 20, 2013 Leave a comment

Updated September 19, 2013, 6:03 p.m. ET

Alibaba’s Stock Market Quest

Why the Chinese Internet company won’t list in Shanghai.

It looks ever more likely that the world’s largest tech IPO since Facebook will have to wait until next year. China’s Alibaba, an online trading portal, expects to raise at least $10 billion when it lists, but it is struggling to figure out where it will sell its shares. New York and Hong Kong are the main competitors. Less often discussed is that Shanghai is not on the short list, or even the long list. This is the result of China’s slow pace of financial reform. Twenty-three years after the Shanghai Stock Exchange opened, the exchange is still ineffective at mediating capital flows between global investors and growing companies. Chinese entrepreneurs face the hassles and costs of heading overseas to list instead.One problem is that foreign investment in Chinese financial assets is capped, and investors must secure quotas from Beijing. Only institutions need apply. The total amount of investment allowed was increased this summer, to $150 billion from $80 billion, a further step in the steady lifting of the cap.

Foreign investors have only taken up part of the quota as it is, but that may be due to the fact of the quota. By limiting investment inflows, Beijing deters dynamic companies such as Alibaba from listing in Shanghai, leading to less demand for the quota.

It also doesn’t help that Beijing still manages the stock market for political ends. Regulators periodically block the IPO pipeline to curtail the supply of shares in an attempt to support the market. The current listing halt has been in effect since last November.

Underlying these financial shortcomings are broader weaknesses affecting all companies operating in China—especially a capricious, unaccountable government and weak rule of law. It’s hard enough for a company like Alibaba to conduct its day-to-day business in that environment. But even the most promising company will struggle to attract foreign investors to a market with opaque regulation and less robust legal protection.

Alibaba founder Jack Ma will eventually raise equity capital on some exchange for his booming Chinese business, but it won’t be in China. That highlights the need for Beijing to push forward with financial liberalization for the benefit of future Jack Mas and the growing companies they create.

Filed under TMT Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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