Black Swans anyone?
The paper highlighted this week is dense; but there’s a part I have to abstract in full because its highly topical and I can’t summarize it easily. Alibaba fans please take time to digest independent research analyst Mr. Michael C.I. Nwogugu’s thoughts here:
“..Alibaba poses a substantial financial stability risk due to its operations, financing and accounting disclosures; and because of the following reasons. … Any sudden drop or collapse of Alibaba’s stock prices can or will have a significant and negative effect on not only the stock prices of internet/technology companies around the world, but also the stock prices of S&P-500 companies, logistics companies, retailers, electronics parts suppliers and manufacturing companies and their credit ratings. Any announced or perceived financial distress of Alibaba will likely have a negative effect on the many companies that it hosts and also the credit ratings of many internet/technology companies around the world, and on the stock prices of S&P-500 companies, logistics companies, electronics parts suppliers and manufacturing companies regardless of whether or not they supply products/parts to Alibaba’s corporate clients. In Alibaba’s business model, Alibaba essentially finances or props most of its corporate customers by reducing their customer acquisition costs and providing them with much needed visibility and logi[s]tics. Alibaba’s annual revenues, profits and assets are among the largest in the world. Products sold through Alibaba affect more than one billion people around the world. Alibaba’s ecosystem involves many companies and more than one million products. Thus, any negative news that affects Alibaba’s stock price or its perceived credit quality can cause rapid contagion and financial instability.
Alibaba is a side-road from Mr. Nwogugu’s main point.
He chronicles in excruciating detail the systematic fraud perpetrated not only by U.S. listed Chinese companies in recent years but also provides a handy table of Hong Kong listed offenders too [Jump into the paper at P.21 for the lists. Hard to believe when you see them all together].
That so much fraud has been possible on such a recurrent basis leads Mr. Nwogugu to conclude that the architecture of investor protection, especially but not limited to the U.S., is clearly ineffective.
My two cents. His point about Alibaba and systemic risk could equally well apply to Tencent or some of the other China operators that have been allowed to form, in such a short period of time, such a major part of the global financial transaction ecosystem.
Boosters of the idea that Hong Kong should pursue the creation of a lightly regulated Turd-Board [It’s ‘Third’! We talked about this? Ed.] for FinTech and other hard-to-list-elsewhere chancers are especially encouraged to read in more depth.
You can access the paper in full via the following link Alibaba and Cross-Listed Chinese Companies.
Happy Sunday.