Alibaba: Reality Discredits Relentless Media Bashing On Chinese Firms
- President Biden's $2.3 trillion "once in a generation" infrastructure investment plan helped drive U.S. stock markets higher. Ironically, it was Chinese equities that scored bigger wins.
- As naysayers trumpet that China and Chinese companies are going to fail, the commander-in-chief is extolling how powerful the "greatest adversary of the U.S." is in his efforts to push.
- Biden's tax revisions could spur American firms to retain their profits in China. In turn, Beijing would encourage Chinese companies to invest overseas to relieve the appreciation pressure on yuan.
- Lacking an offensive, American companies could be finding themselves isolated and lacking influence in fast-growing regions like Southeast Asia and Africa.
- Various proposals from government bodies were picked up by the media as the basis of numerous doomsday scenarios for Chinese internet platform operators but those draft rules may not pass muster.
By ALT Perspective for Chinese Internet Weekly
The major positive news last week was President Joe Biden's proposal for a $2.3 trillion "once in a generation" investment on infrastructure in the U.S. Ironically, it was Chinese equities that scored bigger wins, with the representative Chinese ETFs generally surpassing their U.S. counterparts (QQQ)(DIA)(SPY) in terms of weekly returns.
The Invesco China Technology ETF (NYSEARCA:CQQQ) jumped on Thursday, bringing the five-day gain to 5.4 percent. The share prices of its top three largest holdings, Tencent Holdings (OTCPK:TCEHY)(OTCPK:TCTZF), Meituan (MEIT)(OTCPK:MPNGF)(OTCPK:MPNGY), and Baidu (BIDU) shot up 7.3 percent to 14.0 percent. The trio represented 26.7 percent in weight of the CQQQ ETF. True to its name, the ETF comprised 47.0 percent in companies categorized under Information Technology.
In contrast, the iShares China Large-Cap ETF (NYSEARCA:FXI), which counts Alibaba Group (NYSE:BABA) as its top holding, rose 4.7 percent. Alibaba stock registered a five-day gain of only 0.7 percent, dragging down the gains by the FXI ETF. The ETF was also bogged down by the lackluster performance of its financial stocks, with the sector representing a hefty 30.2 percent of the total portfolio.
The Xtrackers Harvest CSI 300 China A-Shares ETF (NYSEARCA:ASHR) climbed the least among the three Chinese ETFs, rising a mere 4.0 percent. Nevertheless, when viewed on a two-week basis, it appreciated more, as it closed flat the previous week, while the other two ETFs suffered losses.
#Note that the chart is showing the past five trading days as a four-day shortened week format does not render properly on YCharts.
Investors sitting up on the contrast between America's "crumbling infrastructure" and China's rapidly improving transportation network
I suspect that the proposed massive investment package has brought to the fore hard truths about the "crumbling infrastructure" in America. In President Biden's exhortation to congress to approve his infrastructure plan, he inadvertently advertised China's superiority. In reference to China, he said "they have a major, major new initiative on rail and they already have rail that goes 225 miles an hour with ease."
Source: Google (screenshot on April 2, 2021)
President Biden attempted to spook the legislators of the danger of falling behind China, warning that "if we don't get moving, they are going to eat our lunch." In response, a Bloomberg commentary mockingly said "Sorry, Mr. President, lunch was served—and eaten—long ago."
Investors were reminded of the rapid improvement in transport connectivity in China through the related news coverage last week. I have written previously on how Chinese e-commerce players have leveraged the massive infrastructure buildup over the past decades to connect the millions of sellers to hundreds of millions of shoppers across the large country.
Every now and then, we come across news on China building or having built the world's longest [fill-in-the-blank] bridge. To top it all, the Danyang–Kunshan Grand Bridge, a 169-kilometer-long (105 miles) viaduct on the Beijing–Shanghai High-Speed Railway completed in 2010, is the longest bridge in the world in any category. Currently, six of the ten longest bridges are in China.
China's railway network has also expanded in a breakneck fashion and its high-speed development is particularly impressive. According to data (as of end-July 2020) by China State Railway Group, 36,000 km out of 141,400 km of existing rail lines are high-speed routes, the longest in the world by far.
Nevertheless, I felt the media and the President were too harsh in their assessment of American infrastructure. The World Economic Forum dropped the U.S. down to 13th place in a broad measure of infrastructure quality in its 2019 Global Competitiveness Report. The U.S. was ranked as high as fifth in 2002. However, its score of 79.6 for transport infrastructure still trumps China's 68.9. Going deeper, the WEF awarded the U.S. a score of 74.5 for "quality of road infrastructure", while giving China a much lower score of 59.7.
Source: World Economic Forum's 2019 Global Competitiveness Report
Sensationalized headlines on China's "forever upcoming" downfall keep getting debunked
When it comes to media bashing, China has arguably been given harsher treatment. Scary headlines alluding to an ever soon-to-be burst "property bubble" and the "brewing debt crisis" have been perennially churned out during the past two decades but the Chinese economy has continued to grow year after year.
The populous nation's resilience against odds has inspired Thomas Orlik, Chief Economist at Bloomberg, to write a book titled China: The Bubble that Never Pops. In it, the author exclaimed that even the country-wide economic standstill to contain the COVID-19 pandemic in the first quarter of 2020 failed to pop the bubble.
As I noted in The Contradictions Of Alibaba And Pinduoduo, the media sometimes couldn't make up their mind on where they stand. In his book, Orlik coined the word "Sinophrenia", which stood to mean "the simultaneous belief that China is about to collapse and about to take over the world." As naysayers trumpet that China and Chinese companies are going to fail, the commander-in-chief is extolling how powerful the "greatest adversary of the U.S." is in his efforts to push for more spending.
Meanwhile, the Chinese economy continues to trudge along. The official survey of purchasing managers released by the National Bureau of Statistics showed the manufacturing PMI inching up to 51.9 in March, up from 50.6 in February and higher than the consensus expectation for 51.2. The March reading was supported by increases in output and new orders, together with import and export orders.
China's non-manufacturing PMI was more outstanding, rising to a four-month high of 56.3 in March from 51.4 in February, beating forecasts for a small increase to 52. The gauge of sentiment in the service and construction sectors was driven by a "rapid growth" in business volume in railway transportation, air transportation, telecommunications, broadcasting and television satellite transmission services, internet software and information technology services, and financial services sector, with the business activity indices in these areas coming in above 60.
The privately compiled Caixin Manufacturing PMI was a tad disappointing, coming in at 50.6 for March, lower than the consensus estimate for 51.4 and February's 50.9. The consolation is that it marked the 11th consecutive month of expansion for the manufacturing sector. Investors can take comfort with recent reassuring comments from the central bank governor who said China's total debt-to-GDP ratio was hovering at a stable level and the country remained capable of injecting liquidity into the economy.
President Biden's tax revisions would keep American firms' cash in China and spur Chinese acquisitions globally
I believe that China should be concerned with too much cash in the financial system in the next few years instead. To help foot the bill for the ambitious infrastructure spending, Biden intends to raise the U.S. corporate tax rate to 28 percent from 21 percent, and increase taxes on companies' foreign income to 21 percent from 10.5 percent. Collectively, about $1.3 trillion could be raised from this arrangement over the next decade if the bill is passed.
The proposed tax plan would enact a 15 percent minimum tax on the "book income" that the largest corporations report to investors to thwart the exploitation of tax code loopholes to lower their tax liabilities or in many cases, eliminate completely and even extract tax rebates despite being profitable.
A study done by the Institute on Taxation and Economic Policy and published on Good Friday revealed that "at least 55 of the largest corporations in America paid no federal corporate income taxes in their most recent fiscal year despite enjoying substantial pretax profits in the United States." Despite collectively earning nearly $40.5 billion in U.S. pretax income in 2020, according to their annual financial reports, the named companies had paid no taxes and received $3.5 billion in tax rebates instead.
Based on the statutory federal tax rate for corporate profits at 21 percent, the American firms should have been liable for a combined total of $8.5 billion for the year. This meant that they enjoyed a total corporate tax break of $12 billion for 2020. Breaking this down to the company level with some household names might make it easier to make sense of the matter of contention.
- Delivery giant FedEx (FDX) paid no federal income tax on $1.2 billion of U.S. pretax income in 2020 and received a $230 million tax rebate.
- Sports footwear and apparel powerhouse Nike (NKE) paid no federal income tax on $2.9 billion of U.S. pretax income in 2020 and received a $109 million tax rebate.
- Cable TV provider Dish Network (DISH) paid no federal income tax on $2.5 billion of U.S. income in 2020 and received a $231 million tax rebate.
Despite being singled out by Biden for not paying "a single solitary penny" in federal income taxes, none of the major media outlets (at the time of writing, to the best of my knowledge) carried any headlines on the potential negative implications on Amazon.com Inc (AMZN). A 15 percent minimum tax applied on Amazon's 2020 pretax income of $24.2 billion would yield $3.63 billion for the U.S. government, more than triple that of the $800 million to $1 billion fine that Alibaba Group has been touted by the media to receive as a result of an anti-monopoly investigation on the company. The potential fine on the latter has, however, been the subject of various bad press on Alibaba.
The enforcement of a minimum tax would encourage American firms, many of them that count the Chinese market as a major one, to increase their sales in China and retain their profits there. If the U.S. Treasury succeeds in its endeavor to create a global minimum tax through the Organization for Economic Co-operation and Development (OECD), international companies would follow suit.
In early 2017, the CFO of Apple, Inc. (AAPL), Luca Maestri admitted during the company's conference call with analysts that 94 percent of the over $200 billion in cash belonging to the company was being held overseas. If the reversal of the favorable tax policy for the repatriation of funds becomes effective, we would see companies like Apple reverting to its old practice of keeping the money elsewhere.
The development would play into the hands of Chinese companies eager to invest overseas. With the yuan already under immense appreciation pressure due to growing foreign investment in China's capital markets, Chinese financial regulators have been allowing more money to leave the country. When the Chinese operations of American businesses keep more cash within the country, Beijing could relax their reins on the Chinese tech titans to acquire stakes in foreign companies, facilitating their international expansion.
Amidst the regulatory crackdown on the monopolistic practices of the internet giants, it's easy to forget that Beijing would benefit from the rising global proliferation of mobile payment apps Alipay and WeChat Pay, operated by Alibaba's Ant Group and Tencent respectively. In major cities across Europe at both tourist attractions and shops often patronized by the Chinese communities, it's common to see signs showing the acceptance of the two payment apps. The same can be said of countries in Southeast Asia and certain African cities.
My Chinese contacts foresee a future where Chinese nationals, whether as tourists or workers, transact in foreign lands using the digital yuan, while the local businesses, in turn, use that digital yuan to pay their Chinese suppliers, bypassing the U.S. dollar and Western-controlled payment network like SWIFT.
This view is shared by Richard Kang and Nadia Schadlow of Prism Global Management who wrote in the article Financial Technology Is China's Trojan Horse published in January that the infiltration has already happened: "Either Alibaba or Tencent has invested in every single one of the 13 technology unicorns—startups valued at $1 billion or more—in Southeast Asia."
Ironically, the more threatened Washington feels, the more it would restrain the expanding Chinese global reach. In turn, Beijing would be more motivated to do all it can to reduce its reliance on western systems while pushing its own. With Trump's America First stance and the Biden administration focusing on rebuilding America, it seems the government led by Chinese President Xi Jinping has a good chance of escaping the "encirclement".
Given time, it could even turn the table around, with American firms finding themselves isolated and lacking influence in non-Western regions like Southeast Asia and Africa. Chinese internet giants like Alibaba would have the fast-growing markets with consumers enjoying ever higher purchasing power all to themselves. Currently, Alibaba's Lazada and Sea Limited's (SE) Shopee dominate Southeast Asia's online shopping market. Tencent is a major shareholder of Sea Limited.
Ant Group is far from "crumbling" amidst "crackdown"
But wait, you are thinking, aren't Ant Group being dismantled or shrunk? Could it regain its former glory to fulfill this international ambition? Well, who said Ant Group is facing serious issues anyway? Angela Huyue Zhang, a director of the Center for Chinese Law at the University of Hong Kong, recently argued that China's central bank, the People's Bank of China [PBoC], might have overestimated the reach of its authority in seeking a breakup of large digital payment platforms.
The author of the book Chinese Antitrust Exceptionalism: How the Rise of China Challenges Global Regulation exhorted readers not to see the Chinese government as "a monolith" and explained that "power is fragmented within the Chinese bureaucracy." Tellingly, although the PBoC has issued a slew of demands both directly to Alibaba and Tencent as well as to the State Administration and Market Regulation, the agency responsible for antitrust, things haven't gone its way much.
For instance, Alibaba and Tencent refused to comply with requests to submit their credit data to Baihang, a private credit scoring company created by the PBoC. The latter was not directly in charge of consumer data and could not demand the operators of the digital payment platforms to do its bidding.
Some of the PBoC's draft rules for antitrust offenses, such as enforcing the breaking up of a company, have been picked up by the media and served as the basis of numerous doomsday scenarios for Ant Group. Fortunately for the employees and shareholders of Ant Group, Angela clarified that China's Anti-Monopoly Law does not offer the option of carving up a business for abuse of monopoly power. Most importantly, the central bank's proposals are only "a departmental guideline and have no authority to contravene this national law."
When more investors come to know of the rationality of Chinese laws, perhaps Alibaba stock could have a chance to "reach for the moon" again. For now, the privilege is reserved for JD.com (JD), which surprisingly hitched itself a front-seat position in ARK Invest's new ETF aimed at the space exploration field (ARKX).
Source: ARK Invest
The fund management company founded by Cathie Wood explained that companies that stood to gain from aerospace activities, "including agriculture, internet access, global positioning system, construction, imaging, drones, air taxis and electric aviation vehicles." For instance, e-commerce firms like JD and Alibaba would reduce logistics expenses through the use of mass-market low-cost drones for last-mile deliveries.
Meanwhile, Ant Group's Alipay, China's largest mobile payment service, has reportedly been receiving a greater slice of commissions. Several banks acquiesced to Alipay's demand to raise its share of the processing fee from transactions performed on its platform "by up to 80 per cent since the beginning of this year."
To put it in another way, the lenders whose customers rely on the ubiquitous payment app for myriad transactions daily, have to endure ever-shrinking share of the fees. That this strong display of upper hand over state-owned banks is happening despite the supposed government affliction on Jack Ma's empire, beginning with the dominant Alipay, is the most brazen evidence supporting refutations of the bears' argument that Ant Group, together with its parent company, Alibaba Group Holdings, would crumble under Beijing's crackdown.
Source: Alibaba Group
With the shift in sentiment to positive for several individual internet stocks, the Chinese Internet sector representative ETF, the KraneShares CSI China Internet ETF (NYSEARCA:KWEB), climbed 5.1 percent for the week. As explained in a past issue of the Chinese Internet Weekly, I found the KWEB ETF holding the most representative stocks in the sector. As such, an overview of the week's share price movements of the top few holdings of KWEB as compared with the ETF itself is provided as follows for convenient reference especially for the stocks mentioned in this article.
#Note that the chart is showing the past five trading days as a four-day shortened week format does not render properly on YCharts.
This article was written by
Disclosure: I am/we are long BABA, BIDU, JD, TCOM, TCEHY, NTES, BEKE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.