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Potential US investment ban adds to Alibaba's regulatory woes

Alibaba Group Holding Ltd. faces the risk of being delisted in the U.S. as the outgoing Trump administration considers a potential ban on U.S. investments into the company and its peer Tencent Holdings Ltd., compounding problems for the Chinese e-commerce operator amid a regulatory crackdown at home.

Officials from the State Department and the Defense Department are in talks to add Alibaba and Tencent to a blacklist of companies due to alleged ties to China's military and security services, The Wall Street Journal reported Jan. 6.

Blacklisted companies include surveillance camera maker Hangzhou Hikvision Digital Technology Co. Ltd., chipmaker Semiconductor Manufacturing International Corp., and telecoms companies Huawei Technologies Co. Ltd. and ZTE Corp. Investment or purchase of stocks, funds or other financial products of the businesses will be banned starting Jan. 11, and investors will have until November 2021 to divest their holdings.

Alibaba's Hong Kong-listed stock closed down 3.9% on Jan. 7 while its U.S. listed shares fell 5.3% on Jan. 6 after the Journal reported news of the proposed ban. Tencent's Hong Kong-listed stock closed down 4.7% on Jan. 7.

U.S. asset manager Blackrock owns a 3.37% stake in Alibaba and is its second-biggest shareholder, after Japanese conglomerate Softbank. Alibaba's other top U.S. institutional investors include T. Rowe Price Group, Vanguard Group, State Street Global Advisors and JP Morgan Asset Management, according to S&P Global Market Intelligence data.

SNL ImageAlibaba CEO Daniel Zhang during the company's listing at the Hong Kong Stock Exchange on Nov. 26, 2019.

Source: Alibaba

Escalating antitrust scrutiny into Alibaba in recent weeks has raised unease about Beijing's oversight of the company. The State Department in August expressed concern about threats posed by cloud-based systems run by Alibaba, Tencent and Baidu Inc., while Alibaba's fintech affiliate Ant Group Co. Ltd. has also been asked by Chinese regulators to share consumer credit data, the Journal reported. In December 2020, a bill was passed by the U.S. Congress that could see Chinese companies delisted if they do not comply with auditing requirements.

The delisting of three Chinese telecommunications companies, China Mobile Ltd., China Telecom Corp. Ltd. and China Unicom (Hong Kong) Ltd., from the New York Stock Exchange shows the extent of the risk from the escalating tension against Chinese companies, said Ken Wong, analyst from Hong Kong-based Founder Securities.

Alibaba was looking to raise $8 billion through dollar-denominated bond sales as early as the second week of January, according to Reuters. It is unclear if Alibaba has anticipated the U.S. investment ban with the planned bond sale, Wong Kok Hoi, founder and CIO of APS Asset Management, told S&P Market Global Intelligence.

"The latest move seems to be part of a strategy to cut off the supply of capital to China's leading companies ... [The] Biden administration [is] unlikely to immediately reverse Trump's decision because Biden can't be seen by Americans as not tough on China," said Wong Kok Hoi.

The backlash in the U.S. and growing antitrust risk faced in its home market have sent Alibaba's share price downward, but the effect is likely to be only temporary, Wong from Founder Securities said. "I expect it to only affect the short-term stock performance. It will not affect the fundamentals of the company."

However, a delisting of Alibaba is "unthinkable" and may get caught up in legal challenges similar to previous attempts by President Trump to block TikTok Inc. and WeChat, said Arun George, global TMT analyst who writes on research platform Smartkarma and co-founder of Global Equity Research.

"The potential ban sounds like another rushed and ambiguous policy by the Trump administration. It is difficult to draw any conclusions at this stage, as it is not clear if U.S. investors investing in, say, Hong Kong funds will fall foul. At this stage, I would wait for the Biden administration to take over on Jan. 20 to get a clearer picture," George said.

Even if it is delisted in the U.S., Alibaba should not be concerned about long-term capital inflow as the strong fundamentals of its business attract stable investor demand, especially in the Hong Kong market, where it established a secondary listing in November 2019, Wong from Founder Securities said. The antitrust risk that it is facing in its home market is also unlikely to do long-term harm to the company, he added.

"As long as it does not affect consumers who continue to use its platforms, Alibaba's revenue and profit will have stable growth," Wong said. He believes that e-commerce platforms Taobao and Tmall, as well as its digital payment affiliate Alipay, will remain market leaders even with minimal marketing spend to counter competition from rivals.

"Looking at what is happening in the U.S. and Europe, tech companies such as Facebook Inc., Alphabet Inc. and Amazon.com Inc. have faced antitrust investigations for years. Their stock prices were affected for a short time, but the growth of these companies has not been affected in the medium term. It is the same in China," he added.