Expropriation Risk in China: How Much Should We Worry About the Alipay Transfer?

A lot of folks are still talking about the ongoing fight between Yahoo and Alibaba. As you no doubt recall, Yahoo is a tad bit miffed at China e-commerce behemoth Alibaba. Yahoo owns 43% of Alibaba, which until recently gave the American firm partial interest in valuable online payment company Alipay. Unfortunately for Yahoo, Alipay was sold (Yahoo says without Board authorization) to a company owned by Alibaba CEO Jack Ma. Now Yahoo owns 0% of Alipay. Bummer.

I wrote a post about the corporate brawl earlier this month, mostly from the perspective of general risk assessment of China by foreign companies in light of the current mini bubble with Chinese Net firms. Let’s take another look at the topic.

Seeking Alpha has an article (penned by contributor “Northwest Investor”) on the subject focusing on the alleged collusion between private company Alibaba and the Chinese government to essentially expropriate an asset from a foreign investor, Yahoo.

Investors sold on the China story need to take heed: If what you buy in China only stays “bought” as long as convenient for Beijing and their local friends, you might consider that you’re just leasing the asset. Like Hong Kong and Macau, if they want it, sooner or later its going back.

What’s particularly troubling about this story is the suggestion of collusion between Chinese authorities and Mr. Ma, and this story begs the question as to whether any foreign investor in China can expect fair play.

When the Chinese state uses its regulatory policies to the disadvantage of foreign investors, and does so unpredictably and at the behest of local businessmen, then one’s “investment” becomes a speculation. What will China think of your company tomorrow? Will some Chinese entrepreneur take an interest in your enterprise, and prevail upon friendly (to him) state authorities to make life hard for you?

Is this a fair take on China risk assessment, or is it slightly paranoid? As usual, the answer is ‘it depends.’ While not in a unique position, Yahoo is in a strange and unenviable one. Think about all the things about their equity position that must give government officials here heartburn:

1. Yahoo owns a major stake in a famous Chinese company — this by itself must make a lot of folks in Beijing unhappy.

2. Alibaba is an Internet company — doesn’t get any more sensitive than that, perhaps with the exception of the military sector.

3. Alipay is an online payment company — take all the regulatory concerns of the Net sector and add those from banking/finance, and you’ll understand why this area is so special.

You probably see where I’m going with this. Yahoo has some particular challenges with respect to its Alibaba equity position that foreign investors in other sectors don’t really need to worry about. To put it another way, the Chinese government isn’t about to force ACME Widgets to sell its 30% stake in the Dongguan Number 2 Widget Factory back to its Chinese partner because of bullshit regulatory “concerns.”

That doesn’t minimize Yahoo’s troubles of course. Whether you believe Jack Ma’s narrative of events or that of Yahoo’s Jerry Yang, the American search firm has a problem with Alibaba.

But is this really a new concern for China investors? Yes, the investment environment might be tough at the moment, but Yahoo’s problems are really nothing new and are easily understood. Just jump on Yahoo and run a search under the keywords “Joint Venture, China, fighting,” and you’ll be rewarded with numerous articles on the subject. This is a very old story when it comes to foreign direct investment in China.

If the regulatory authorities here colluded with Jack Ma to strip Alipay from Alibaba, this is troubling. But protectionism is nothing new here, and it wouldn’t be the first time that a domestic firm enlisted that kind of government assistance. Moreover, Yahoo’s stake in Alibaba is not exactly a typical China foreign investment and carries a lot of risk.

Foreign investors should always be wary of disputes with local partners, particularly those with friends in high places. But most investors are not Yahoo and shouldn’t lose too much sleep over this one melodramatic dispute.