Alibaba’s Jack Ma is still young, healthy, and his company is firing on all cylinders. Yet, he recently stepped down as chairman at a handsome ceremony – posing as a rock star and singing a few tunes. The musical theme was appropriate. He has been whistling past the graveyard for many years – as is the lot of prominent businessmen in the People’s Republic of China.
How a private business operates in a Communist Party-run state is a perpetual head scratcher. However, a Western businessman with over three decades experience in China offered some insights.
You see, the Jack Ma’s of China may be entrepreneurs, but they are as much “Chinese Communist Party (CCP) corporate trustees.” And Ma’s usefulness as a CCP corporate trustee has reached the end of its shelf-life.
The businessman continued:
Jack Ma and Alibaba were in effect used by the Party to counter eBay’s unexpected and stunning success in China. And in China, the Party always wins. As eBay’s fortunes sagged and Alibaba’s took off so did the career of Jack Ma.
Under the mild-mannered Premier Hu Jintao, Ma became a national and international icon. He served many roles the Party wanted China and the world to see.
When Xi Jinping came into power Davos was not big enough for Xi and Ma. Someone had to go. It was clear to a lot of people that Ma began to chafe under Xi’s increasing expectation that trustees like Ma subordinate themselves entirely to Xi.
Ma perhaps didn’t know when to say “when.” In 2015 he purchased 28,000 acres of pristine upper New York state forest lands. This was okay under Hu, not under Xi. As far as is known Ma still has the land that he designated “preserved for the environment.”
As long as he steps down from Alibaba, acknowledges Xi’s supremacy, and only talks about the environment he may be able to keep the land (and his house on Hong Kong’s Peak). If he falls afoul, Beijing will claim Ma purchased the land with “black money” and will want asset ownership turned over to the PRC government….a frequent tactic now when foreign real estate is the asset.
One might expect Ma to declare his philanthropic future by building a conference and retreat center on the property where CCP officials and their corporate trustees can retire for rest, reflection, appreciation of the environment…..and meet Wall Street tycoons and American business leaders (and former U.S. State Department officials) to pitch the benefits of investing in China.
Indeed, maybe Jack Ma’s crowning achievement is not building Alibaba into a major global corporation. Rather, it is staying both alive and out of jail as long as he has.
The businessman further explained:
Alibaba, like Huawei, HNA and similar ventures, are licensed and documented as “private” companies when in fact they are better thought of a as state-owned-private-enterprise companies (SOPE’s)…an expression the Western businessman coined.
The company “founders” are loyal CCP members (something Jack Ma kept hidden for many years) running the company effectively as CCP appointed trustees. The companies receive all kinds of perks (including protection), subsidies and access to whatever is needed to create powerful “champion’” companies across most major lines of business and industry.
Trustees are given executive responsibility to a great degree to run companies as they see fit – and thus appear like “regular” CEO’s of the Western sort. But in doing so, they must follow these guidelines, noted the businessman:
-Must use company to fulfill CCP policy objectives (serve the party first and foremost)….these include political, business, brand-building and China nationalism objectives
-Build large entities in scope and scale, capability and capacity in their special field of endeavor
-Develop and/or acquire leading-edge technology
-Acquire Top 500 Company world status
-Be a major contributor to establishing new global standards for their respective business field (breaking the U.S. monopoly of the past 60 years or more)
These SOPEs have a deep line of credit with the CCP and the People’s Bank of China’s SAFE (State Administration of Foreign Exchange) should they need U.S. dollars for their overseas activities. As long as they stay within the CCP’s policy objectives FX (foreign exchange) authorizations continue.
Try paying overseas in Chinese Yuan and it’s only a few degrees better than using Zimbabwe dollars. There’s a reason why moving one’s wealth overseas and turning it into U.S. dollars or other convertible currencies has been a national sport in China for years – even for CCP elites.
The businessman continued: The trouble starts when the celebrity trustee (they attain huge celebrity status in China) begins to get full of himself and starts to enter into transactions beyond his business scope. This is usually where the debt problem begins to appear because there is no automatic FX payment to bail them out of a non-policy transaction gone bad. Trying to fix the problem only makes its worse. The attempted remedies don’t work – piling more debt on top of more debt.
The CCP will fund SOPE debt as long as it goes to supporting policy objectives. They will not fund non-policy debt. Non-policy, usually debt-ridden ventures get sold off at fire sale prices.
And there is frequently a “coming to Jesus” meeting in Beijing where any number of things can happen to a trustee – from forcing him to sell off non-policy debt-inducing assets, to accepting “retirement” to charges of corruption and a life sentence in prison….and no more access to the CCP’s official black hair dye #6. Indeed, CCTV showing court proceeding clips where the former celebrity tycoon now has white hair is the greatest indignity that can be levied on a person in political China. The citizenry knows justice (such as it is) has been served.
As a recent example of the CCP taking back one of its SOPEs….there is Anbang Insurance Company which got into a lot of things around the world other than insurance. The company was taken over by the government, renamed and rebranded as “Dajia Insurance.” Its owner got 18 years in prison.
And the HNA conglomerate’s boss, Wang Jian, died in a fall in France last year after the company got overextended. An accident? The French police said so. But Chinese tycoons that run into trouble die with improbable frequency. And as one observer put it: “Typically, a man of Wang’s stature in China does not stand next to a 50 foot drop-off…especially for a photo.”
But isn’t Alibaba different? Yes and no. Jack Ma wisely avoided the “overreach” that landed Anbang, HNA, and others in trouble. But in the PRC success can be as dangerous as failure. And CCP leadership just might view highly profitable Alibaba as a juicy ripe peach. The Party is the state (and everything in it), after all.
The businessman note that, of course, not all Chinese companies are SOPEs. Small and medium size Chinese companies that you find seconded in distant parts of Los Angeles, for example, are wild-west outfits running up all kinds of debt in U.S. dollars. These are not SOPEs, do not have high-level backing and do not receive much consideration, if any, from SAFE.
When these guys go broke you don’t want to be their creditor.
So, despite Jack Ma’s considerable abilities and success, he can only be as successful and free as the CCP allows him to be.
I can hear it now…”Newsham you’re all wrong!” Perhaps. But here’s a test: Have Jack Ma announce that he’s changed his mind and is going to retake Alibaba’s helm – running it as he sees fit and spending the earnings as he wishes. Will he be invited to a celebratory dinner in Zhongnanhai? Maybe. But if so, he’ll do well not to pose for photos afterwards on the rooftop.
This CCP sword of Damocles also hangs over foreign companies in China. But there’s no shortage of Western executives who think it will be different for them. They’ve got well-connected Chinese friends who love them, and anyway, they are smarter than everyone else.
But this only ends one way. Just wait a while and watch what happens to Elon Musk and Tesla after going all-in on China.
Musk should be glad he’s not Chinese. He’ll only lose his company.