The Rising Influence of Rising Affluence

[DewDiligence]

Alibaba’s political risk is even bigger than one might think:

http://online.wsj.com/news/articles/SB10001424052702304431104579547321592632220

Technically, China restricts foreign participation in the sensitive and strategic Internet sector. So those who buy into Alibaba's share offering won't have direct ownership but only the rights to profits that Alibaba pays to an offshore vehicle. This is how it works with all overseas-listed Chinese Internet stocks, most of which trade in New York, and Beijing can close this loophole at any time—as it threatened to do in 2011, when Chinese shares listed in New York were getting pounded amid a series of accounting scandals.

…The enormous market shares in China's Internet sector are the flip side of censorship—the dominant firms are in hock to the country's leadership for creating barriers to broader competition. Strict state controls not only limit foreign competition (Facebook is blocked and Google retreated in the face of China's censors and spies), but Beijing also makes it difficult for would-be domestic players to enter the market. Leaders calculate that it is easier to control a few market leaders than zillions of competitors.

But there is no guarantee that Beijing will forever cater to monopolistic Internet-sector behavior… China's leaders may also find it distasteful that Internet firms are practically printing money, and thus think up ways to relieve them of some of that windfall.

…My bet is that market shares in the Chinese Internet industry have peaked. That should give investors pause when asked to pay monopoly prices.