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Analysis: Alibaba flotation throws lifeline in US-China rift

Excitement is mounting for Chinese-based e-commerce giant Alibaba's listing in New York later this year. As the regulatory audit oversight tug-of-war between China and the US shows no sign of abating, some hope the IT monolith's IPO could provide the final push towards the long-awaited agreement.

Alibaba's floatation truly is a blue-moon event. Valued between $150bn and $200bn, it is more lucrative than its two largest global rivals, Amazon and eBay, combined; in the first nine months alone of the fiscal year ending March 2014 it totalled $2.9bn in profit, on almost on $6.5bn of revenue.

Despite a conservative statement of intent to raise $1bn through its Initial Public Offering (IPO), market estimates suggest Alibaba is likely to surpass the $16bn record set by Facebook two years ago, making it one of the biggest tech flotation in US history, and the largest ever by a Chinese company.

According to the latest industry reports, Alibaba expects to sell over 200m shares in its initial offering, leading some analysts speculating the floatation will reach for the $17.9bn record established by Visa in 2008.

However, history shows Chinese companies' listing on US markets has rarely been trouble-free.

Among the most notorious examples, the 2011 Chinese software provider Longtop Financial Technologies scandal saw many US investors hit hard, as share values dived following Deloitte's resignation as auditor after revelations of extensive accountancy fraud within the company.

Following the revelations at Longtop and several other Chinese companies listed in the US, the US Securities and Exchange commission was unsuccessful at obtaining audit papers of such companies due to auditors citing Chinese secrecy laws.

A joint motion to dismiss the ensuing lawsuit brought by the SEC against Deloitte's Chinese firm was filed in January 2014, after Chinese regulators handed in many of the sought documents, but cases such as this are slow to fade in the memory of investors.

Where does Alibaba fit in?
Alibaba's audit opinion is issued by PwC's Hong Kong arm, a branch which has succeeded in escaping the 6-month suspension of audit practice imposed by the SEC on China's Big Four accountancy giants.

PwC's Mainland branch is currently appealing the ban, but many believe a settlement to be unlikely unless China agrees to apply US security laws to its companies listing in American stock exchanges.

Indeed, there are fears that the US Public Company Accounting Oversight Body (PCAOB) might begin rescinding the registrations of those firms it cannot inspect, effectively extending the ban from six months to indefinitely.

It is in the midst of this heated regulatory environment that Alibaba's IPO looks set to take on an even more significant role.

Paul Gills, professor of practice at Peking University's Guanghua School of Management says: "It's hard not to imagine that the Alibaba IPO right now would have a discount in its valuation, based on these regulatory problems, and if those regulatory problems were resolved that discount would go away."

As such, he believes Alibaba's IPO has the potential to progress talks long trapped in stalemate, "because of the great interest in this IPO and the amount of money that is likely to be invested in it, I think it increases the awareness of the issue and increases pressure to get a resolution."

Gills is optimistic about the pressure that could be exercised towards a trans-Pacific agreement by what he forecasts will be the "largest technology IPO of all time", but he warns: "For it to work, I think a deal has to be some kind of arrangement that respects China's national sovereignty, while at the same time giving the United States regulators the information they need to enforce US laws."

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