January 3, 2019 / 6:32 PM / 5 months ago

Breakingviews - Cannabis will take China tech’s path to propriety

A fully budded marijuana plant ready for trimming is seen at the Botanacare marijuana store ahead of their grand opening on New Year's day in Northglenn, Colorado December 31, 2013. REUTERS/Rick Wilking

NEW YORK (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 and Scotts Miracle-Gro 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, Weibo, Tencent 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 reut.rs/2R6H5pG

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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