Peter Thiel is fond of a rhetorical device: “What seems like X should really be understand as ~X’” An example: “You have to think of companies like Microsoft or Oracle or Hewlett-Packard as fundamentally bets against technology.”
Here’s the trick applied to understand what it means to invest in Alibaba. Is Alibaba the next great technology company, or is it really something else?
Thiel touched on this in a talk at the American Enterprise Institute with James Glassman.
China thinks of the internet in a way that’s very different from the U.S. They think of information technology as something less important than we do economically, and more important politically.
And so these companies are fundamentally political investments. They’re protected by the government. They won’t face competition from Western companies.
So an investment in Alibaba is fundamentally a bet that Jack Ma will stay in the good graces of the Chinese Communist Party. I suspect that that’s a good bet…
Relatedly, here are his more general thoughts on China, via his essay published (in 2008) for Hoover’s Policy Review. Is a bet on China a bet on successful globalization, or is it really something else?
One intermediate possibility is that the China of 2014 will be like the internet of 2007 — much larger, but with winners very different from the ones that investors today expect. The largest New Economy business is Google, a company that scarcely registered in early 2000. Might it also turn out that the greatest Chinese companies of 2014 will be concerns that are private and tightly controlled businesses today, rather than the high-profile and money-losing companies that have been floated by the Chinese state?
At the very least, outsiders need to understand that China is controlled for the benefit of insiders. The insiders know when to sell, and so one would expect the businesses that have been made available to the outside world systematically to underperform those ventures still controlled by card-carrying members of the Chinese Communist Party. “China” will underperform China, and a “China” bubble exists to the extent that investors underestimate the degree of this underperformance.
This limitation also may be framed in terms of globalization. In important respects, “China” as a financial economy is sustained by the absence of globalization — in particular, by the enormous amounts of capital trapped within China’s borders that must either suffer slow death from inflation (now running higher than Chinese bank deposit rates) or brave the acute sense of vertigo of the elevated stock market. Because the free convertibility of the renminbi would dampen equity speculation, a long “China” position is not a forecast that financial globalization will succeed, but rather a bet that its internal contradictions will persist.