Alibaba May Be Too Big to Fail

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By Jacob Maslow

 Banner on the New York Stock Exchange marking the Initial Public Offering of the e commerce company Alibaba in New York City on September 19, 2014.
Banner on the New York Stock Exchange marking the Initial Public Offering of the e commerce company Alibaba in New York City on September 19, 2014.

Usually, when the phrase “too big to fail” is mentioned, we are usually talking about American banking institutions. You probably remember that this phrase was used quite frequently during the great financial crash. The United States spent billions upon billions of dollars buying up toxic assets because certain banks were just too big to fail. The thinking was that their demise would cause more problems for the broader American economy than the cost of saving them.

Well, when it comes to the Chinese stock market, Alibaba may be too big to fail. Alibaba, as you are probably already of, is one of the biggest publicly traded companies. It is a huge presence on the global financial markets. In a way, it is a crown jewel to China’s technological and financial development. Since there are a lot of financial and status components riding on Alibaba’s perceived market strength, it may be too big to fail.

The Limits of China’s Anti-Corruption and Regulatory Crackdown

Alibaba ran into some bad news recently when it got into the crosshairs of Chinese regulators. The Chinese regulators made a big deal of the fact that some third party sellers on platforms maintained by Alibaba were selling counterfeit goods. This drove Alibaba’s stock price downward. However, the silence after that initial news was deafening. We didn’t hear anymore from the anti-corruption and regulatory police after that.

The truth is that China’s anti-corruption and regulatory crackdowns have a limit. The limit is that if they cut too close to the bone, and either collapse a big Chinese brand or drive too much capital away, they would stop. While Alibaba is not the target of an anti-corruption probe, it is the target of a regulatory crackdown. Expect this to have a limit.

The Happy Compromise?

The happy compromise between Chinese regulators and Alibaba is actually quite simple. It actually exists in other countries. The happy compromise is pretty straightforward. In order to protect Alibaba, since it is valuable to the Chinese economy on many different levels, the regulatory regime placed on it would have a higher level of tolerance than other players. Is this unfair? Of course it is. Is it necessary? Unfortunately, at least from the Chinese perspective, it is.

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