Behind the great walls. Photographer: Nelson Ching/Bloomberg
Behind the great walls. Photographer: Nelson Ching/Bloomberg

Alibaba's initial public offering prospectus makes it clear that potential investors are looking at a very Chinese business: huge and fraught with the dangers of working under a protectionist, paranoid government and within a murky legal framework. Those who buy into Alibaba's upcoming $20 billion IPO will be investing in China's policy of creating "national champions," without any guarantees that their rights will be honored or their input appreciated.

The Chinese internet is protected by two great walls. One is built of language and culture. Adapting the look, feel and usability of Western sites so they feel "native" in China is not an easy task. A lot gets lost in translation. Even in Russia, with its much easier language and largely European culture, Western web services lose out to local competitors (local search engine Yandex is more popular than Google, the social network Vkontakte has more users than Facebook).

Then there's the government-built wall. The government favors Chinese companies that have risen to the top of their industries or were specifically formed to do so. The charming story of English teacher Jack Ma setting up Alibaba in a small apartment must be understood in the context of Beijing's efforts to help the company thrive and expand. Alibaba's cloud division, in particular, has benefited from government funding under a special five-year plan to boost cloud-computing development. The division accounted for about 1.4 percent of Alibaba's revenue in the nine months to December 31.

The Chinese national champions' business is mainly local. As Jack Ma himself said about eBay more than 10 years ago, "Ebay is a shark in the ocean. We are a crocodile in the Yangtze River. If we fight in the ocean, we will lose. But if we fight in the river, we will win." In 2006, eBay wound down its Chinese operation, though it remains a big player elsewhere in the world. In the nine months though December, 2013, 87 percent of Alibaba's revenues came from e-commerce within China.

China is the land of volume, so its giant companies are a little like dinosaurs with huge bodies and small heads. While Alibaba rang up more in transaction volume last year than Amazon and eBay combined, a whopping $248 billion, its revenue for the financial year, $5.55 billion, was only slightly higher than eBay's revenue for the fourth quarter alone ($4.3 billion). eBay's net income for the year was twice as high as Alibaba's. Although China has plenty of growth potential as internet penetration increases and people grow wealthier, the world outside its walls holds just as much opportunity and is more diversified.

Alibaba's ample international ambition will be held back by the company's Yangtze crocodile DNA. A former Aliren, or Alibaba employee, last year described the company's highly traditional, patriarchal culture in a lengthy, slightly bitter blog post. "The government knows it needs more innovation from its people to ensure growth and stability, yet it is not willing to let go of control," Hao Wu wrote. "Neither, it appears, is Alibaba of its employees."

The control issue is relevant for potential investors. The Alibaba prospectus makes it clear that, to comply with Chinese law restricting foreign ownership of internet and telecommunications companies, licenses to the company's money-making services are held by "variable interest companies" majority-owned by Ma. These companies pay fees and royalties to an offshore entity, in which foreign shareholders will be offered stock during the listing. Because Alibaba is a Chinese company, investors will not really own it. They will have to rely on Ma to honor his obligations to the offshore entity and transfer profits to it.

Buying into the scheme is a matter of trust in China's closely controlled internet environment, and in the goodwill of both Ma and the Beijing government -- which, incidentally, is tightening rules in the money transfer industry, where Alipay, an Alibaba spin-off that will not be part of the IPO, is a major player. Ma is vocally displeased about this, as much as that is possible in China. The Alibaba prospectus contains 27,000 words about risk factors, many of them political and regulatory.

Before rushing to buy Alibaba stock, read those 27,000 words carefully.

To contact the writer of this article: Leonid Bershidsky at lbershidsky@bloomberg.net.

To contact the editor responsible for this article: Mark Whitehouse at mwhitehouse1@bloomberg.net.