Alibaba Group Holdings (HK:9988) and (BABA) saw its shares lurch 6.3% lower in Hong Kong trade after its Ant Group affiliate was linked to a bribery scandal in its hometown.
But prospects for consumer-focused companies in general already look lackluster in China, with the country's slowing growth further hampered by Covid lockdowns and a lack of mobility heading into the Lunar New Year.
Alibaba shares have lost 9.4% since Thursday's close, after Ant was swept up in a corruption scandal in Hangzhou.
Chinese state broadcaster CCTV aired a show last week providing details on a corruption probe into the Hangzhou party secretary, Zhou Jiangyong. Although Zhou has been under investigation by China's anti-corruption watchdog since last August, there's been no inkling of why.
CCTV stated that unnamed private businesses bought land at cut-rate prices from the city of Hangzhou, after they invested in two mobile-payments companies owned by the party secretary's brother. It did, however, name those payments companies.
A bit of detective work by the Financial Times found that it was an Ant Group unit that bought two plots of land in Hangzhou in 2019, and invested in the mobile-payments companies. Both Alibaba and Ant are based in Hangzhou. The Ant subsidiary was the only outside investor in one of the payments companies.
CCTV said the investments were "unreasonably high payments" to Zhou's brother, in return for positive government support and help buying land. Zhou's brother set up a company that won mobile-payments contracts for the subway in the cities of Ningbo and Wenzhou, where his brother was party secretary at the time. The younger Zhou then set up a company to win subway-payments business in Hangzhou, where his brother was now in charge.
Ant through its unit bought stakes in both the Ningbo and Hangzhou mobile-payments companies, the FT found. It then won an auction for a plot of land in Hangzhou at US$819 per square meter, as the only qualified bidder. Average home prices are around US$7,100 per square meter in Hangzhou.
The plotlines, while intricate, fit a pattern. When a party boss goes down for corruption, his corporate connections typically suffer, too. Local city and provincial governments make a hefty portion of their revenue from selling land.
The impact could see Ant forced to return the land, and potentially fined, with possible action against the executives involved as well. Ant and Alibaba could have bigger problems if the corruption authorities decide there's a broader pattern at work.
The scandal comes at a time when business is already shaky for a wide range of consumer-focused companies.
The CSI 300 index of the largest stocks in Shanghai and Shenzhen is down 2.7% so far this year, bringing the 12-month rolling loss for mainland Chinese stocks to 15.0%.
China's central bank cut interest rates last week for the second month in a row, with further cuts likely, putting it at odds with the general tightening of monetary policy in developed markets. The housing market continues to suffer as authorities force painful deleveraging on the sector.
The Chinese Communist Party's response to sporadic Covid outbreaks and the arrival of the Omicron variant has been to crack down harder and harder on affected areas. Beijing, Shanghai and other major cities have started to be affected meaning travel will be disrupted over the Lunar New Year, which starts February 1. But the authorities are unlikely to relent as the Winter Olympics approach, due to be held around Beijing February 4-20 in a tight "Covid bubble."
Disruptions at Chinese ports have driven shipping costs out of China up more than 400% compared to pre-Covid rates, Commerzbank notes. The uncertain pattern of Covid outbreaks in China will ensure those costs remain very high.
China is "running to stand still," T.S. Lombard says in a research note. "China is stimulating simply to stand still." Whatever happens, the authorities will likely report growth of 5% for 2022, whether that happens or not.
Many economists expect China to miss official "forecasts" of 5% to 5.5% GDP growth this year. Nomura expects full-year growth to hit only 4.3% in 2022. That's a rapid deceleration from the 8.1% growth last year, a Covid bounceback that produced the strongest economic expansion in almost a decade.
Consumer confidence is already depressed, and the mood isn't helped by the authorities promoting a "celebrate in place" approach to the Lunar New Year. That's like Thanksgiving and Christmas wrapped up in one in terms of importance on the Chinese calendar, a key time for urban workers to return home, sometimes for the only time in the year. The 500 million rail trips that normally occur over the two weeks around the holiday will likely be down around 40%, Lombard predicts.
Standard & Poor's, in a broad report on Chinese consumer businesses, says that "dark clouds linger longer" than expected, and there's a greater negative tilt heading into this year than last. Weakness in the property market, a key source of wealth, and the zero-Covid approach "would sap consumer spending," the rating agency expects.
Revenue growth in consumer companies will run around 10% to 15%, half the 20% to 25% last year, S&P predicts. While the ratings agency is positive on Alibaba's rival JD.com (HK:9618) and (JD) , there are regulatory risks in the Chinese tech sector, too.
JD shares fell 5.6% on Monday. No surprise that Alibaba shares fared worse, the scandal impact tainting compounding concerns about how willing Chinese consumers will be to reach into their wallets over a key holiday.
Alibaba shares have fallen 53.8% in the last year. That has driven what was Asia's largest company by market capitalization well down such rankings, with chipmaker Taiwan Semiconductor Manufacturing (TW:2330) and (TSM) wresting that title away.