Cannabis will take China tech’s path to propriety

Medmen Enterprises

03/01/2019 18:12

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By John Foley
    NEW YORK, Jan 3 (Reuters Breakingviews) - America’s cannabis
growers will follow an unusual path to propriety. The subversive
industry is feared by the establishment, with investors reliant
on legal loopholes. Yet these companies are starting out much
like China’s tech giants did. In the same fashion, as they
create jobs and wealth, appetite for reining them in will wane. 
    The budding sector is already a lesson in loopholes.
Thirty-two states have legalized marijuana’s medical use even
though it remains strictly taboo on a national level. Federal
authorities look the other way so long as producers stick to
their home turf and list their shares abroad — usually in
Canada, where recreational pot is legal and three companies have
achieved 10-digit market capitalizations. Conventional outfits
like MedMen  MMEN.CD  and Scotts Miracle-Gro  SMG.N  are getting
in on the action even though doing business across state lines
is forbidden and big banks won’t touch the industry. Former
Attorney General Jeff Sessions once said “good people don’t
smoke marijuana,” yet he did little to stunt its growth.
    Existing in a legal limbo might sound like a red flag.
There’s another industry, though, that exploited multiple
loopholes on its path to greatness: Chinese tech. Alibaba
 BABA.N , Weibo  WB.O , Tencent  0700.HK  and others grew up
using structures of dubious legality and peddling products that
aroused governmental anxiety. So-called variable interest
entities, a way of structuring a company that is common in
Chinese tech, are patently against the spirit of the law, but
they enabled foreigners to invest in off-limits sectors like the
internet. Without them, these online giants wouldn’t be what
they are today.
    
    That ruse could have been unwound at any time by Beijing.
Yet as the tech firms got bigger — and more productive — the
desire to stamp them out receded. Companies like Alibaba and
Tencent are now among China’s best-known global brands, and some
76 percent of U.S.-listed Chinese concerns still use the
variable interest entity, according to researcher Fredrik
Oqvist. Alibaba founder Jack Ma is even a member of the
Communist Party. At some point, governments decide it’s better
to co-opt them than beat them.
    Cannabis growers may never achieve Alibaba’s $400 billion
market value. But the industry is on course to create half a
million jobs by 2022, according to Arcview Market Research, the
same number congressional researcher G. B. Granger estimated to
be employed in the illicit alcohol trade before the United
States ended prohibition in 1933. It’s also about the same as
work in the utilities sector. Politicians may not agree on weed,
but they know an economic good when they see it.
    - This is a Breakingviews prediction for 2019. To see more
of our predictions, click https://reut.rs/2R6H5pG
 
    On Twitter https://twitter.com/johnsfoley 
    
    - For previous columns by the author, Reuters customers can
click on  FOLEY/ 
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 (Editing by Tom Buerkle and Amanda Gomez)
 ((john.foley@thomsonreuters.com; Reuters Messaging:
john.foley.thomsonreuters.com@reuters.net))