Will American lawyers end up making bigger profits from Didi Chuxing’s initial public offering (IPO) than investors? That this is even a question only days after the ride-sharing giant listed in New York is both ironic and a terrible look for Chinese tech companies.
There’s already buzz about class-action lawsuits over the regulatory chaos surrounding last week’s US$68 billion market debut. Chinese regulators waited until after the listing to announce a probe into China’s answer to Uber on national security grounds.
They ordered app stores to stop offering Didi’s platform, alleging it was illegally collecting users’ personal data. Investors are confused and bruised. Didi’s stock fell 5% after the news broke.
But some clarity is starting to emerge, suggesting that Didi was not being entirely open in the run-up to its listing. A Wall Street Journal report suggested mainland regulators had urged Didi to delay its $4.4 billion IPO, advice that went unheeded.
Why in the world Didi defied Beijing – and think they would get away with it – is the next mystery for investors to mull. Does this suggest a broader standoff between Big Tech and the authority of President Xi Jinping’s regulators?
Either way, the controversy comes just after Didi pulled off one of the grandest US equity market debuts of the last decade. The surprise investigation – or Didi executives thumbing their noses at Beijing – layered extra uncertainty onto a nine-year-old company already under the spotlight for concerns about anti-competitive tactics and data security.
Much of the scrutiny prior to last week flowed from President Xi’s crackdown on internet behemoths like Alibaba Group and Tencent Holdings, the latter a big Didi backer.
As punters struggle to make sense of it all, here are four takeaways worth considering.
1: The empire strikes back – again
Whatever happened at Didi, the rapid rise of China’s cybersecurity regulators looking to demonstrate their power took investors by surprise.
China’s core cybersecurity laws were implemented between 2016 and 2017. In June, Beijing added new provisions for how internet giants collect, store and utilize data. That suddenly has the Cyberspace Administration of China, or CAC, showing teeth investors didn’t see coming. And it’s raising concerns that investing in Chinese tech is getting riskier by the day.
The real problem, says Lauren Maranto, China expert at the Center for Strategic and International Studies, a US-based think tank, is the “ambiguous nature” of rules that give Beijing huge scope to curb the tech industry in ways for which investors can’t really prepare for or hedge against.
And, in turn, that is confusing Chinese tech companies about where the real red lines are.
“China’s ambition to be a global leader in technology development, combined with an increasing digital reliance in day-to-day life, means that a heightened focus on data security is crucial for protecting citizens’ information,” Maranto says. “Yet the country’s regulations on data collection often fail to safeguard citizens’ privacy, instead giving the government wide leeway to interpret laws.”
Maranto adds that “from the deliberate ambiguity of new cybersecurity and data protection laws, public reports of data leakages and the government’s monitoring of Chinese citizens, it’s clear that China puts a greater emphasis on government access to data than it does on protecting individual and company privacy.
“Because of this, Beijing will gain further control over Chinese society, while leaving the privacy and security of its citizens and foreign investors vulnerable to exploitation.”
2: It’s best to list at home
It’s hard to ignore Beijing’s other actions around the time Didi had its comeuppance. The CAC is going after truck-hailing apps Huochebang and Yunmanman, companies under the umbrella of the New York-listed Full Truck Alliance.
It’s also probing online recruiter Kanzhun Ltd, which owns Zhipin.com, a startup that last month listed on the US stock market.
It’s hard not to read what Kendra Schaefer at consultancy Trivium China calls a “tech crackdown party” as Beijing’s way of discouraging domestic companies from listing on US bourses. For sure, US investors who bet big on China’s vast tech potential are left wondering if it’s worth the hassle.
“Whatever the reasons for China’s national security actions, the US perception is that Beijing cynically timed its regulatory blow to fall after Didi had sucked up US investors’ cash,” says analyst Ernan Cui at Gavekal Research.
Didi, after all, would seem a no-brainer success story you’d think the Communist Party would be holding up as an example of what’s possible in China.
Along with Tencent, China’s dominant ride-hailing player counts SoftBank Group’s Masayoshi Son among its top shareholders. It beat the odds and made money in the first quarter and pulled off the second-biggest US IPO by mainland disrupters.
What a nice financial cherry atop last week’s celebration of the party’s 100th anniversary, no?
Yet the party seems more threatened than proud, while making clear it wants tech companies to keep their core assets – from data to algorithms – in China, says analyst Xiaomeng Lu at Eurasia Group. The signal is that Beijing “is not pleased to see its national champions cozying up to foreign stakeholders.”
But that’s how global capitalism works – investors everywhere vote on such champions with their “buy” orders. However, many mainland companies listing in the US this year have a common complaint: tepid outcomes.
A case in point was insurance tech startup Waterdrop, which was also backed by Tencent and also ignored pushback in Beijing and listed abroad anyway. It’s traded poorly.
A Reuters analysis of data from analytical firm Refinitiv this week found that of the 25 mainland Chinese companies that have gone public in New York this year, 17 are “underwater,” featuring a median negative return of 22%.
It’s hard to separate the chilling effect from Beijing’s tech crackdown.
3: It looks like amateur hour in Beijing
Assuming that the Wall Street Journal report is accurate, Didi did not only make an error of judgment in ignoring Beijing’s demands, it is also at fault for not disclosing its beef with Beijing authorities to investors.
That raises questions about the governance of what had been looking like a new stock market star.
But questions are hanging over not only the company but also the wider Chinese tech scene. The Didi IPO debacle is happening in the midst of a regulatory offensive launched by Beijing against tech firms.
Markets and pundits are still reeling from the Jack Ma fiasco.
In November, Ma’s fintech giant Ant Group was set to pull off history’s biggest IPO, a $37 billion listing that would have made the year for investment houses as Ant sold shares simultaneously in Shanghai and Hong Kong.
After Ma criticized regulators in a late October speech, the IPO was scrapped and Ma effectively vanished from view for a period.
Given that fallout, economist Martin Chorzempa at the Peterson Institute for International Economics speaks for many when he says he’s “stunned.”
After the “bombshell investigation announced days ago,” Chorzempa said, “China’s cyber regulator just ordered Didi pulled from app stores in China over data protection.”
Economist Alicia García Herrero at Natixis quips: “This is what I call ‘legal certainty’ with Chinese characteristics.” Analyst Abishur Prakash at consultancy CIF Global notes that these internal risks are colliding with an “increasingly hostile US government toward Chinese tech firms.”
The timing of Beijing’s moves against Didi has the US Securities and Exchange Commission and watchdog groups like the Public Company Accounting Oversight Board facing pressure to respond quickly and decisively.
US authorities, after all, are still smarting from the fraud scandal at then US-listed Luckin Coffee, what analyst Anne Stevenson-Yang at J Capital Research calls a “great morality tale” for markets.
There is hope Washington might tread lightly. Yet given the strong stance of new SEC Chairman Gary Gensler, on top of public and political confusion generated by debacles like Luckin and Didi, compromise looks unlikely.
Whatever Xi’s regulators may be thinking behind closed doors, the perception is that Beijing’s desire for control is getting in the way of efforts to internationalize the economy.
China’s financial hardware has stock indexes like the MSCI and bond benchmarks like the FTSE Russell giving yuan-denominated assets bigger weightings.
Yet Beijing’s financial software – ie, its regulations, and its confidence in letting free markets do their work – is proving a difficult balancing act. So is the learning curve, perhaps, for domestic CEOs.
4: Expect tech decoupling to accelerate
If, as Gavekal’s Cui puts it, “Chinese regulators are souring on its tech firms listing in the US for separate cyber-security reasons, the momentum to an accelerated decoupling of the two countries’ equity capital markets will increase.”
Though Donald Trump is gone, President Joe Biden shows no signs of letting up on China Inc.
A case in point is investors still must mull the implications of recent legislation to delist mainland companies that don’t comply with US auditing standards. There’s a question, too, about how Biden’s own regulatory team might calibrate efforts to bring mainland companies to heel.
The issue is that “at the heart of it, the US and China agendas are at odds,” says Anne Hoecker, Bain & Company’s Silicon Valley expert. “Escalating tensions between the US and China have accelerated the unraveling of globalization more quickly than many predicted even a year ago. This trend isn’t likely to reverse course.”
More likely, they will intensify.
“Now,” Hoecker says, “executive teams at leading technology companies both within China and around the world are coming to grips with a new reality that has serious implications for their businesses: the US and Chinese economies and technology ecosystems are headed toward decoupling.”
Biden’s recent moves to roll back Trump’s bans on WeChat and TikTok did little to allay fears about an even bigger disconnect between Washington and Beijing. Yet whereas the Biden White House is keen to score goals against China Inc, Xi’s government continues to rack up its own goals at a moment Beijing should be taking economic victory laps.
For punters who want to make a China play, the regulatory confusion emanating from Beijing – not to mention the possibility of companies defying their powerful state regulators – is a buyer-beware signal.
If Xi’s inner circle and China’s top executives don’t start playing by a more transparent and discernable rulebook, international investors may come to the conclusion that global capitalism just isn’t China’s thing.