BEIJING — State-backed entities have taken tiny stakes in parts of two Alibaba subsidiaries that oversee a video platform and web browser.
News of the holdings in the last week raised concerns about Beijing’s influence over the U.S.-listed e-commerce giant. However, the affected subsidiaries are just two of several units under the company’s digital media and entertainment arm — an arm that accounts for 4% of Alibaba’s revenue.
Alibaba shares have gained slightly over the last five trading days.
The state-backed stakes reflect a progression of government directives over the last decade to increase control of media in China. The so-called golden shares, or special management shares, generally allow the state-backed entity to install a board member with the power to veto decisions — for the company the entity has taken a 1% stake in.
It will likely take a couple months to see what level of influence the state has gained, said Liqian Ren, leader of quantitative investment at WisdomTree. “So far most of the stakes announced (including in other Chinese companies) seem to be highly concentrated on media companies and media subsidiaries.”
“It’s very natural for the Chinese government to want to control how information is disseminated,” she said, “particularly if you believe China has entered a period where there will be much more frequent protests.”
Groups of Chinese held public demonstrations in late November to protest stringent Covid controls. Reports of other protests in the last several months include some Tesla owners upset with price cuts, people at a provincial capital protesting frozen bank deposits and disgruntled workers at certain factories.
Since 2020, business records show state-backed entities have taken 1% stakes in popular social media or short-video apps Weibo, ByteDance’s Douyin and Kuaishou. That’s on top of censorship that often deletes articles or freezes accounts over words deemed sensitive.
Along with media, finance and energy are the two other industries that Beijing is inclined to control, said WisdomTree’s Ren. Her firm has a fund for investing in Chinese companies that aren’t state-owned.
Alibaba is the largest holding in that fund. Ren said WisdomTree isn’t making changes to that holding at this time, because it recently completed its annual review and because it only considers state-owned enterprises as those with government ownership of more than 20%.
SoftBank is by far the largest holder of Alibaba’s U.S.-listed shares, at nearly 24%, according to S&P Capital IQ. Vanguard and BlackRock are next, each with holdings of less than 3%, the database showed.
About two-thirds of Alibaba’s annual revenue of about $125 billion comes from China commerce.
How small are the stakes?
Here’s where state-backed entities have bought in to Alibaba, according to business database Tianyancha:
- Guangzhou Lujiao Information Technology is connected to a group of subsidiaries under Alibaba’s media arm that operate the UCWeb browser. A fund — ultimately backed by China’s cybersecurity regulator and finance ministry — took a 1% stake in Lujiao in January, leaving an Alibaba subsidiary with 99% ownership. Lujiao more than tripled its registered capital to 35 million yuan ($5.16 million) this month.
- Youku Yingshi, which has 70.7 million yuan in registered capital, owns Youku, one of the three major video streaming platforms in China. A provincial state media group completed a 1% investment in September, leaving Alibaba’s media arm with 99% ownership.
Records showed each subsidiary also gained a new board member with the same name as an individual connected with the respective state-backed stakeholder. It was not immediately clear if they were the same person.
“Our digital media and entertainment business (such as Youku) brought in a state-owned multimedia entity as a minor strategic investor for a consolidated entity,” Alibaba said in its fiscal year report published July 26.
“This shareholder has the right to appoint a director of the relevant consolidated entity and other rights including certain veto rights over the content review processes,” the company said, warning of the impact on trading prices from market perception — and the potential of more state oversight on its content-related businesses.
Alibaba declined to comment. The Financial Times and Reuters previously reported on the government-linked stakes.
Signs of a regulatory shift
The news of the state-owned stakes comes as Alibaba shares try to recover from two years of sharp losses in the aftermath of the abrupt suspension of affiliate Ant’s IPO in November 2020. International investors have become more wary of Chinese stocks after increased regulation of China’s once freewheeling internet industry.
“There is no government as ambitious in regulating big tech as the Chinese government,” said Rogier Creemers, professor at Leiden University, and author of the paper “The Great Rectification: A New Paradigm for China’s Online Platform Economy.“
He said China has finished its big changes for tech regulation, and expects other countries will be pushing out their own regulation of big tech companies.
Chinese bank and insurance regulator head Guo Shuqing told state media this month that the “rectification” of the financial businesses of 14 platform companies has been basically completed.
“Minimal, non-controlling government ownership in Chinese tech firms may be an indication that Beijing is done with tightening regulation is shifting to oversight and enforcement,” said Brian Tycangco, analyst at Stansberry Research. “It also means the government now shares, albeit minimally, in the future success of the business.”
Ant in the last few weeks also got approval to expand its consumer finance business — along with investment from a Hangzhou city-backed entity.
Didi said this week it had resolved regulatory concerns and could start to accept new user registrations.
One of the primary regulators is the Cyberspace Administration of China, which ordered a cybersecurity review of Didi shortly after its U.S. IPO. The administration has its roots in propaganda and censorship work, according to Stanford’s DigiChina Project.
State ownership of local media
“Politically speaking, China’s really unpredictable,” Creemers said. “But in terms of policy China is really predictable. It tells us what it wants to do. The problem is we confuse the one for the other. I think it is much more transparent on policy than we give it credit for.”
In the case of golden shares, public information indicates Chinese policy discussion of such special management shares began in late 2013 to help state-owned media companies to become more competitive — and better influence public opinion — while retaining government control.
The following year, authorities approved a new plan for culture and ideology work, which said special management shares for non-state-owned media would be tested. In late 2021, authorities said non-state capital would be banned from owning domestic news outlets in China.
As the government tries to balance out its role with the market, the state will likely become more apparent, said Bruce Pang, chief economist and head of research, Greater China at JLL. “The government will continue to monitor, regulate and re-train private capital to ensure its healthy development. The ‘golden shares’ is just one of the latest evidences of the updated policy stance.”