The recent China slowdown has put the spotlight back on Alibaba. Alibaba is effectively one of the world’s largest shadow banking institution. Despite its “disappointing” 4Q 2015 gross merchandise volume growth (GMV) at 22% vs. 28% prior, Alibaba’s GMV stood at a staggering 964 billion yuan ($147 billion) in the final quarter of 2015.
Source: Statista
It is more intuitive to look at Alibaba not as an eBay but Berkshire Hathaway, that Taobao and Alipay enabled Alibaba’s to take advantage of short-term balances held on the firm’s balance sheet, not unlike insurance float:
Insurance companies earn investment profits on “float”. Float, or available reserve, is the amount of money on hand at any given moment that an insurer has collected in insurance premiums but has not paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest or other income on them until claims are paid out. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.
In essence, Taobao served as a clearing house between buyers and sellers – both buyers and sellers only deal with Taobao. Buyers would receive assurances that the goods would be delivered, and sellers would be paid by Taobao rather than directly from the buyer, thus eliminating credit risk.
Since funds have to flow through Taobao, Taobao effectively becomes a financial intermediary with liberty to invest these funds for profit (with low risk if the investment vehicle is in safe haven assets). Taobao can also provide short-term lending to consumers using its sizable float as a true shadow bank.
Chinese regulators were alarmed by various financial vehicles offered under the Alibaba umbrella, but its money market fund had benefited from the equity market rout: How China’s stock rout disrupted online funds (the “rout” in the article referred to the one in 2015) China’s market selloff may have decked traders but one group is benefiting: the country’s home-grown online finance companies.
“[Funds have been] drawn out the past several months and back the past several weeks,” Sabrina Peng, president of Alipay International, said at the DBS Asian Insights Conference last week.
China’s largest money market fund, Yu’e Bao, is offered by Alipay, a unit of Ant Financial, which is an independent company under the Alibaba umbrella; Yu’e Bao, which is an online offering, had around 578.93 billion yuan (around $93.25 billion) in assets at the end of 2014.
By having the cash float, Alibaba is in a unique position of envy. Large mutual fund companies in the U.S. enjoy the power of “real money” (i.e. they do not need to rely on borrowed cash thanks to fund inflows), and Alibaba enjoys a similar advantage. As long as Chinese consumers keep spending, Alibaba can tab into the transaction float, Warren Buffett style.
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