Tension Between Alibaba and State Banks

Published on Author helvey

The colossal internet firm Alibaba is preparing for an IPO in the US soon. They are expecting to raise up to $15 billion in this initial offering. However, recently firms such as Alibaba and Tencent have been butting heads with a number of the state-run banks within China. Naturally, due to the banks’ government ties, this seems to be a dangerous game to play. The reasons for the tension between the two groups are primarily the internet firms (specifically Alibaba) “offering mobile payment services as well as online investment products featuring returns superior to those offered by state banks.” As expected, any activity taking business away from the banks will be met by their pushing back.

One of the strategies used by the state-run banks is to make the transfer of money out of funds run by the banks (for example, the Industrial and Commercial Bank of China) very difficult. Also, using online payment services used by the internet firms, such as Alipay, does not work when transferring from the state banks. Any anger that the banks harbor towards Alibaba is reciprocated right back. Alibaba founder Jack Ma stated, “What determines success in the market shouldn’t be the monopolies and those with power, but the consumers.” Alibaba has also responded by continuing to offer new and unique funds that continue to attract curious investors that may have otherwise taken their business to the state-run banks. Will the state-run banks find a way to mitigate this developing threat or might we see China’s transition to a fairer market-based economy come to fruition in Alibaba’s success.

Source: http://blogs.wsj.com/chinarealtime/2014/03/26/chinas-largest-bank-declares-war-on-alibaba/

3 Responses to Tension Between Alibaba and State Banks

  1. This tension comes as no surprise–state banks are unhappy to see their monopolies and protected healthy profits threatened from the private sector.

  2. This is simply the free market at play. Privately owned Alibaba offers better services than the state run banks (big surprise). It would be dangerous for the government to hold Alibaba back for simply being a good bank. It isn’t even like a situation in the US where banks are on the line of legal and illegal investments with derivatives etc. Alibaba is simply offering better services to their customers. They are a better run bank and I believe it would be dangerous for China to punish them by holding them back because their own banks are poorly run.

  3. Regulations that lock prices in place encourage firms to arbitrage the difference away. In the US, the equivalent of Alibaba’s Alipay was Vanguard and Fidelity, who began offering MMMFs – money market mutual funds – in the 1970s when inflation was high, such that the real returns on savings accounts were negative. Money flowed out of banks, and eventually interest rate regulation broke down altogether when banks started lobbying against these newcomers and instead began lobbying for the ability to themselves offer instruments that paid higher interest rates. We’ll see in the next year or so.