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Jack Ma speaks at the World Economic Forum in Davos. Photo: EPA

Update | Alibaba faces firestorm as row with regulator escalates ahead of earnings

Alibaba shares end down 4.36 per cent at 2-week low in Wall Street; recovers by 0.5 per cent in after hours trading


Alibaba Group executive chairman Jack Ma Yun is set to face a barrage of questions when the e-commerce giant reports quarterly earnings today, spurred by a government regulator's blistering accusation of widespread fraud and other illegal activities at the company's popular online shopping platform.

A State Administration for Industry and Commerce (SAIC) white paper published yesterday by the news website of the Communist Party mouthpiece alleged that Taobao Marketplace, China's largest online shopping service, sold counterfeit goods as merchants without business licences were allowed to operate and run unauthorised stores.

Alibaba's shares fell heavily in New York, closing on Wednesday at US$98.45, down US$4.49 or 4.36 per cent on the day. It is the lowest finish for Alibaba since January 16. 

The shares recovered in after-hours trading on Wall Street to finish that session at $99 at 9 a.m. Hong Kong time.

In contrast, shares of rival, the second largest e-commerce company in China, closed in New York up over 2.5 per cent to $25.99.

The document marked an escalation in the war of words between SAIC and Taobao, which had published an open letter on its official Weibo account on Tuesday accusing SAIC director Liu Hongliang of commissioning an unfair quality survey of goods sold on the platform and making public the results without giving online shop owners a chance to appeal.

This letter was later removed from Weibo by Taobao, which said it was penned by an anonymous employee.

In a new Weibo post yesterday, Taobao announced its decision to file a formal complaint with SAIC.

"We welcome fair and just supervision, and oppose selective omissions and malicious actions. We believe director Liu Hongliang's procedural misconduct during the supervision process, irrational enforcement of the law and obtaining a biased conclusion using the wrong methodology has inflicted irreparable and serious damage to Taobao and Chinese online businesses," Taobao said.

This would likely serve as small comfort for Alibaba after the SAIC survey published last week showed that more than 60 per cent of products randomly chosen from Taobao failed to meet China's retail-goods standards.

The SAIC white paper also accused Taobao employees of turning a blind eye to complaints raised against the platform's customer feedback and internal credit-rating systems. The employees were also blamed for leaking the regulator's report on counterfeit products to merchants before the authorities could take action against the offending vendors.

But what could be the most damning aspect from the white paper was that it was based on memos from a meeting between Alibaba executives and SAIC officials in July, and that the regulator delayed the report's release to "avoid hindering" Alibaba's initial public offering in the United States.

Hangzhou-based Alibaba, which raised US$25 billion in September in the world's biggest IPO, "must now clarify these accusations to its investors", said Gartner analyst Sandy Shen.

Ma had appeared to adopt a conciliatory stance last night, stressing Taobao's cooperation with the government and announcing the company had formed a 300-person team to fight counterfeiting. "Fake products are not a problem created by Taobao, but Taobao has to bear responsibility and resolve the issue," Ma said.

Benjamin Cavender, a Shanghai-based retail analyst at China Market Research Group, said most consumers on the mainland were not surprised there were fake goods sold on Taobao. "US investors who had done any due diligence prior to investing in Alibaba probably should not be surprised either," Cavender said.

A source close to the Securities and Futures Commission said the regulator's decision in 2013 not to grant Alibaba an exemption from listing rules for an IPO in Hong Kong had not been related to concerns about fake goods on its shopping platform.

Barclays has forecast Alibaba will post total revenue of US$4.486 billion for its third financial quarter to the end of December, up 47 per cent year on year, on strong sales at and Taobao, higher commission income and improved online advertising.
This article appeared in the South China Morning Post print edition as: Jack Ma set to face grilling on Taobao