A sad reality for Alibaba as the company’s woes seem to get from bad to worse with each month that passes by. Indeed it would seem that the past couple of months have been hell for both investors and leaders of the company.
Its shares are at a record low in Hon Kong amidst concern that the e-commerce giant might be forced to lose its primary listing in New York.
According to recent reports, it appears that Chinese regulators are willing to bite more meat off the tech giants operating within its borders- especially those of Chinese origin. In a bid to further the infamous crackdown on tech giants it claimed were operating unlawfully, Chinese regulators are ready to restrict companies’ listing overseas. This has raised suspicions that Alibaba and other groups might be forced to let go of their New York Stock Exchange listings or Nasdaq.
Alibaba’s Hong Kong listing (ticker: 9988. H.K.) fell 2.5% on Thursday to the lowest level since the company launched its listing in Asia in 2019. The company’s U.S stock (BABA) rose 1.5% on Thursday, a noticeable gain after the nearly 4% decline the previous day.
For a long time, Chinese multinationals have been able to sidestep Chinese regulators using Variable interest entities (VIEs). A VIE is a financial designation that allows businesses to consolidate financial statements for companies that are controlled through means other than equity ownership. In China, VIEs are predominantely used to allow foreign investors to participate in industries that are explicitly restricted for foreign investment. Using VIEs, Alibaba and other companies like it have utilized this loophole to sidestep Beijing’s rules regarding foreign investment.
Reports from anonymous sources claim that China is planning to restrict companies from going public overseas using VIEs- For those in Hong Kong, an exception could be made subject to regulatory approval. According to reports, the plans could be finalized as early as this month, forcing companies already listed abroad via VIEs to restructure and be more transparent. For Alibaba and other companies in the same league, this can only spell one word, delisting.
It appears that Chinese regulators are not the only ones trying to dismantle VIEs- U.S regulators are also placing the corporate structures under heavy scrutiny. Gary Gensler, Chair of the Securities and Exchange Commission, has issued a warning regarding the matter. He has claimed that U.S investors may not fully realize the nature of their stakes in U.S listed Chinese securities. According to Gensler, American investors who buy stock in Alibaba actually own a stake in an offshore shell company that has a contractual relationship with the Chinese operating entity.
Alibaba shares have collapsed more than 45% this year, partially a result of the crackdown on Tech giants by Beijing. Its U.S listed stock is currently trading at its lowest since spring 2017. Despite the fact that some investors believe this might be the worst of the crackdown and that the dark days are over, Alibaba’s future still hangs in the balance, and there’s no telling which way it will swing.