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Opinion de un "optimista"

Nov. 29, 2021 12:35 PMAlibaba Group Holding Limited (BABA)DIDI

There’s a high chance that in the foreseeable future Alibaba could be forced to be delisted from NYSE.

Both the Chinese and the US regulators have the necessary tools and their own reasons for delisting one of China’s biggest tech behemoths.

I continue to believe that Alibaba along with the rest of China’s tech sector is uninvestable for non-Chinese nationals at this stage.

Andrew Burton/Getty Images News

Alibaba’s (BABA) fate rests in the hands of Chinese and US regulators, both of whom have more than enough instruments to delist the company’s shares from the US exchanges for different reasons. While in the past the idea of the possible delisting of a company such as Alibaba was something out of ordinary, the recent political developments on both sides of the Pacific make it clear that even the biggest tech giants of this world are not immune to the actions of the opposite, belligerent to each other governments. Going forward, there’s a high chance that in the not so distant future Alibaba could be forced to be delisted from NYSE, as the latest underperformance of its stock, which was caused by the involvement of China in the company’s internal affairs, proves that nothing is impossible at this stage. For that reason, I continue to believe that China’s tech sector remains uninvestable in the foreseeable future, as not all of the political risks have materialized to this day, and it’s better to avoid investing in Alibaba no matter how undervalued its stock might be.

Why VIEs Are Dangerous

In my latest article on Alibaba, I’ve discussed how the Communist Party of China started to strengthen its grip over entire industries to get greater control over the nation’s economic and political life, and how it used its aggressive actions against companies like Alibaba to silence its political opponents. On top of that, the article explained how China’s government found a way to continue to extract more resources from Alibaba by stripping away its Key Software Enterprise status, which gave it preferential tax treatment, and by indirectly forcing it to spend $15.5 billion in the following years on the state’s Common Prosperity development fund. While the involvement of the state in Alibaba’s affairs alone makes it hard to justify a long position in the company, there’s another issue that makes investing in Alibaba extremely risky, and unfortunately, it hasn’t been discussed as broadly as it should be.

While China started to open up to the Western world back in the 1970s under the leadership of Deng Xiaoping, the country continues to restrict and prohibit investments in various industries, which have utmost importance to the national security to this day. The country still prohibits foreign direct investments in most of its biggest tech companies such as Alibaba, and to circumvent such restrictions, Chinese firms used the variable interest entity structure (VIE), which helped them to raise money and indirectly get access to the US capital markets. Under the VIE structure, mainland companies use a complex web of law loopholes to sign contractual agreements and share their profits with offshore entities that are located in safe havens such as the Cayman Islands. After agreements are signed, offshore entities themselves apply for the approval of the SEC to be listed on US exchanges. That’s why when we look at Alibaba’s reports to the SEC, we see that it’s incorporated in the Cayman Islands, which implies that investors who purchase the company’s stock are actually purchasing not a real Alibaba, but an offshore entity that has close connections with its Chinese counterpart.