China regulator blasts Alibaba for illegal business on its websites

By John Ruwitch

SHANGHAI (Reuters) - A China regulator has accused Alibaba Group Holding Ltd (BABA.N) of failing to clean up what it called illegal business deals on the e-commerce titan's platforms, in an unusually strong government criticism of one of the country's biggest private companies.

The State Administration for Industry and Commerce (SAIC), in a report published on its website on Wednesday, said many products sold on Alibaba's e-commerce websites and services infringed upon trademarks, were substandard or fake, were banned or endangered public security.

Alibaba declined to comment on the report.

SAIC said its report summarised a July 16, 2014, meeting between government business regulators and Alibaba, and said it had delayed releasing the report until now to avoid affecting Alibaba's September initial public offering.

SAIC did not elaborate on that decision. The report was later removed from the main page of SAIC's website.

"Alibaba Group has long paid insufficient attention to the illegal business activities on Alibaba platforms," the SAIC report said. The company "let that abscess fester until it became a danger," it added.

The regulator's scathing tone is unusual for a country that champions its largest home-grown corporations and actively encourages their global expansion ambitions. Alibaba, which raised a record-setting $25 billion (16 billion pounds) from its New York IPO, and peers like Tencent and Huawei form the vanguard of a fast-growing Chinese technology sector.

Alibaba's American depositary receipts slid 3.2 percent to $99.63 in Wednesday afternoon trade. The company is to release quarterly results on Thursday.

The report said Alibaba officials, for their part, pledged during the July meeting to take the necessary steps to rectify the problems. The SAIC has a broad supervisory role over online trading platforms and business in China.

Alibaba, which until a few years ago was on a U.S. list of "notorious markets" for intellectual property infringement, has fought hard to tackle counterfeit products to keep its reputation from being tarnished in the run-up to, and after, the IPO, the world's biggest ever listing.

Earlier this month, it reached an agreement with the U.S. Consumer Product Safety Commission to stop the sale of up to 15 illegal or dangerous toys in the United States.

Online fakes, however, remain a big problem in China.

Joe Simone, director of Hong-Kong based intellectual property consultancy SIPS, said the regulator's comments about counterfeit goods were no surprise.

"The frankness of the report and its condemning tone are unprecedented and speak volumes about what the SAIC found in its inspection," he added.

In the report, the regulator said Alibaba had misled consumers during sales events, including its popular Nov. 11 annual "Singles Day" shopping extravaganza.

At last year's event, Alibaba reported a surge in sales transactions to a record high of $9 billion, but merchants told Reuters they felt pressure from Alibaba's Tmall to boost their figures on the day with heavy discounts and delayed recognition of earlier sales.

On Wednesday, Alibaba's consumer-to-consumer shopping website Taobao said it would lodge a complaint with the SAIC over a separate investigation by the regulator that allegedly uncovered a range of counterfeit products on the site.

(Additional reporting by Paul Carsten in Beijing; Editing by Miral Fahmy and Leslie Adler)