I have been interested in Alibaba for quite some time…but not because I want to buy it!
At the moment, China looks incredibly dicey. Private debt is absolutely soaring that there is striking resemblance between the credit bubble disasters of the noughties and china’s credit explosion.
A graph like this will tell you exactly when things are going to have a crash. However, I do know that the fundamentals do not look great.
Not only is China being pumped with debt, the actual performance of those loans are is very questionable. According to a recent McKinsey report:
http://www.scmp.com/news/china/economy/article/2119504/one-three-chinese-banks-failing-create-economic-value-consulting, one in three Chinese loans do not deliver economic value.
What is the connection with Alibaba? Alibaba has launched a flurry of products in the last ten years to “drive innovation for the future”, at least according to Jack Ma. These companies which include Taobao, AliPay and Ant Financial have very complicated structures which are closely inter-linked with each other, often in peculiar ways. And these connections are unregulated.
To quote, Wei Jiang of Columbia University:
The thing that unnerves me about Alibaba is a product it launched recently through Ant Financial called Yuebao, or “buried treasure” in Chinese. Since it was launched in 2013, Yuebao has grown in to the world’s largest money market with assets of about $165 billion invested in different forms of corporate debt.
The issue here is that global debt has already reached 325% of gdp and the majority of this new debt is chinese:
The debt that Yuebao is investing in is more than likely that of chiense banks, or closely related to it.
I am not not alone in thinking this:
Yuebao banking is done outside of regulations: There are no capital requirements or deposit insurance so if something happens, there could be severe social consequences.
So, if Yuebao is selling money market funds secured against banks which are incredibly frothy, Alibaba is dancing on a volcano.