After a Massive $2.78 Billion Fine, Alibaba's Stock Rose Sharply Instead; This is Why

Chinese regulators have hit e-commerce giant Alibaba with a massive 18.2 billion yuan ($2.78 billion) fine over practices deemed to be an abuse of the company's dominant market position. The fine amounts to about 4% of the company's 2019 domestic revenue.

Alibaba was fined for requiring sellers to sell exclusively on its platform. This meant that sellers were not allowed to sell the same product on the platform of Alibaba's competitors. Thus, Alibaba was accused guilty of stifling competition and innovation. The penalty is the latest in a chain of events targeting the company that kicked off last October, after its co-founder Jack Ma criticized regulators, suggesting they were stifling innovation.

Jack Ma had given a speech at a forum in Shanghai that many believed offended China’s regulators. He has since then made only one public appearance, which many speculate is Jack Ma's choice to stay low-key. Authorities have also issued regulations restricting online lending, one of Ant Group’s former growth areas. “The high fine puts the regulator in the media spotlight and sends a strong signal to the tech sector that such types of exclusionary conduct will no longer be tolerated,” said Angela Zhang, author of “Chinese Antitrust Exceptionalism” and director of the Centre for Chinese Law at the University of Hong Kong. “It’s a stone that kills two birds.”

Interestingly, after the company said that this marked the end of regulator investigation into the company, the share price rose sharply. The company’s Hong Kong-listed stock rose 6.5 percent after investors figured that any more specific investigations into Alibaba’s business were unlikely. It seems that for now, investors are just glad it wasn’t worse.

Intriguingly, after China imposed a record antitrust fine on Alibaba Group Holding Ltd., the e-commerce giant did an unusual thing: It thanked regulators.

“Alibaba would not have achieved our growth without sound government regulation and service, and the critical oversight, tolerance, and support from all of our constituencies have been crucial to our development,” the company said in an open letter. “For this, we are full of gratitude and respect.”

The success of China’s internet giants is closely tied to their relationship with Beijing, according to Aswath Damodaran, New York University’s “dean of valuation.”

Investors are “making a joint bet on the company and its relationship with Beijing,” Damodaran, professor of finance at NYU Stern School of Business, told CNBC’s “Street Signs Asia” on Friday. “There’s no way around it.”