FXstreet

Alibaba Group Holdings plans to price one of the largest initial public offerings ever this Thursday (September 18th, 2014) on the New York Stock Exchange. The IPO could raise over $25 billion dollars for Alibaba, its investors and founders. Alibaba is at its very essence a Chinese company, run by a Chinese management team, with Chinese customers, and the overwhelming majority of its revenue coming from business in China. To really understand the prospects of Alibaba, understanding the nuances of the Chinese economy is a requirement.

Alibaba made $5.5 billion and $8.5 billion of revenues in their last two fiscal years. Importantly, 86% and 89% of the past two year’s revenues were from commerce in China when not including cloud computing and “other” revenues. Unequivocally, Alibaba is a Chinese company and highly levered to the broader Chinese economy.

How is the Chinese economy fairing and how will that effect Alibaba? Overall, the current state of the Chinese economy can be described as peaked. It continues to have high growth associated with emerging market economies but with feverish indigestion at times. China clearly suffers from both cyclical and structural economic problems both of which have been created by a combination of internal country dynamics and shifts in world growth post Great Recession.

To understand China’s economy in any detail, it is crucial to grasp two facts: China is the second largest economy in the word; and, China is a planned economy. According to the World Bank, China’s total GDP was over $9 trillion in 2013 as compared to $16.8 trillion for the US, the world’s largest economy. Depending upon how it is measured, the percentage of the global economy inuring to the benefit of China is between 10% and 15%.

The biggest problem with the Chinese economy is the unknown amount of leverage in the banking system particularly loans tied to the health of the domestic property market. Stories of massive housing developments as literal ghost towns are common. Beyond stories, the issue is that banks have been urged by Chinese authorities to make suspect loans to boost the economy. The housing market is seen as the proverbial canary in the coal mine for the Chinese economy and it is a sick market right now. New home prices have fallen four months in a row.


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