How Will Alibaba Spend Its Money?

10/08/2014 12:01 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

MoneyShow's Jim Jubak discusses how Alibaba is going to spend its cash and he finds one of their ideas quite exciting.

One of the things that's really interesting after the big Alibaba (BABA) IPO—there is $25 billion—is that while, say, a company like Yahoo (YHOO), which is a big beneficiary since they sold a lot of sales, doesn't seem to have a clear idea of what to do with its money.

Alibaba itself is moving straight ahead, and I'd say they're doing two things, one of which is a continuation of what they were doing before and sort of like a page from the Amazon (AMZN) playbook, and the other is something really big and new and daring and this company hasn't slowed down at all, so the old thing is they basically bought—for pocket change—$500 million—they bought 15% of a company that provides IT services to hotels in China. They sell their products to about 6000 hotels. It's not because Alibaba wants to get into the hotel information technology business, but they see this as a way to move traffic for booking, which is one of the things this company they bought does. They see the way to move this traffic through their Taobao ecommerce site, so basically, it's standard state of business; what Alibaba, what Amazon does.

You buy a smaller company, you break into a new market, you add more stuff to your marketplace, and that's how you grow the marketplace. Okay; the icon-blasting thing—the new element—is that Alibaba seems to be in talks with the banking authorities in Hong Kong to open a money market fund in Hong Kong. This would be through Alibaba's Alipay unit, their e-payment business; very big business. Now, Alipay already operates a money market fund in China; has about $90 billion of deposits. The hook here is that they can offer, say, about 4% on your money as opposed to 1% or so, for most people, from a bank, so that's why people move money into this. The groundbreaking thing here is that really, it would be; they would have to get a banking license in Hong Kong and actually open a bank and that would be a big thing. It would be the first e-payments company to have a bank in Hong Kong, but they would also be one of the first companies to be able to just move money back and forth across the Hong Kong border with China.

China's got a huge number of currency controls. It's a very controlled transfer. You have to be a versatile roster business to be able to do it for certain purposes. This would be a big thing; not just for Alibaba, but for China because, again, it would move China a little closer to having currency which moves back and forth across borders freely like the US dollar does. This is a big thing for China, because China clearly wants to move the yuan…renminbi—whatever you want to call it—into the role of the global currency and to do that, you have to have a currency that can move across borders. People are not going to put money into something that, because some regulator in some place says no—can't be used to pay a transaction—so free transfer across borders is one of the key obstacles to the yuan becoming a global currency.

This plan, which would allow money to be deposited in Hong Kong and then used in China, would allow the currency to move back and forth. It would not be a mutual fund, a money market fund in Hong Kong dollars. It would be in yuan and renminbi, so the money would have to move back and forth across the border, so this will be a huge deal. It's, again, relatively controlled, and I think the likelihood is that it's going to get approved; not so much because Jack Ma, the founder of Alibaba, has so much clout, but because the time is right for China. I think China sees the possibility of using this as yet another way to liberalize its own currency controls, so it's going to take a while, especially with the current chaos in China and the sort of distrust between China and Hong Kong, and it's not at all clear how that affects regulators and all that nonsense, but I think it will take a while; I think it'll happen, because this really is where China wants to go and just at the moment, the fact that China and Alibaba both want to go in the same direction makes this deal more likely than not.

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