China seems to want to decouple its companies from Western markets
VSHENG WEI, the billionaire founder and CEO of Didi Global, had barely a moment to revel in his company’s New York City listing of $ 4.4 billion. Within 48 hours of the IPO (Initial Public Offering), which valued the Chinese rideshare giant at around $ 70 billion, regulators in Beijing spoiled the party. On July 2, the Cyberspace Administration of China (CAC) said he opened an investigation into the company. The announcement reduced its share price by 5%.
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Two days later, the regulator ordered Didi’s mobile app to be removed from app stores in China, preventing new customers from joining the service (existing users can still flag taxis). the CAC alleges that Didi illegally collected and used personal data. Didi said he “will do his best to rectify any problems” but warned of “negatively impacting his earnings in China”. As might be expected, the ban also negatively affected the market value of the business. When US markets reopened on July 6, Didi quickly lost more than a fifth. It is now worth $ 22 billion in less than a week.
the CACThe move is an escalation in China’s crackdown on big tech companies. On July 5, it asked three other apps, Yunmanman and Huochebang, which operate truck and freight delivery apps, and Boss Zhipin, an internet recruiting service, to stop enlisting new users. Trucking Services, which merged as the Full Truck Alliance, and Kanzhun, owner of Boss Zhipin, together raised $ 2.5 billion in U.S. stocks last month.
Wolf Warrior of Wall Street
In total, Chinese companies have raised $ 13 billion in America so far this year, and $ 76 billion over the past decade. About 400 Chinese companies are listed in the United States, roughly twice as many as in 2016. During this period, their combined market value has grown from less than $ 400 billion to $ 1.7 billion. These investments are now in jeopardy. On July 6, Chinese authorities announced they would tighten the rules for companies listed abroad or those looking for them. It is the most brutal effort yet to disconnect China Inc from the US capital markets.
In addition to regulating what corporate data can and cannot be shared with foreigners, the new rules would target “illegal securities activities” and create extraterritorial laws to govern Chinese companies listed abroad. Chinese regulators also want to restrict the use of offshore legal structures that help Chinese companies bypass local limits on foreign ownership, according to Bloomberg, a news service.
Almost all of the listed Chinese tech giants in America, including Alibaba, a $ 570 billion e-trader, as well as Didi, use such “variable interest entities” (LIFEs). A LIFE is domiciled in a tax haven such as the Cayman Islands, and accepts foreigners as investors. It then creates a subsidiary in China, which receives a share of the profits of the Chinese firm using the structure. The Chinese government has long implicitly supported this fragile arrangement, on which hundreds of billions of dollars in US investment are based. Now he wants Chinese companies to seek explicit approval for the structure. The assumption is that Beijing would hesitate to grant it. Existing LIFEs may also be subject to scrutiny.
A formal blessing from Beijing can help avoid the kind of mess Didi found himself in. In April, the company was one of 30 companies called by the CAC and the National Tax Administration. He was given a month to conduct a sprawling self-inspection. He added a warning that he “cannot assure [investors] that regulatory authorities will be satisfied with our self-inspection results ”to the risks listed in its prospectus, as well as antitrust laws, pricing, privacy, food safety, product quality and taxes. He went ahead with his New York Initial Public Offering still. Punishing the company immediately after listing looks like deliberate retaliation for insisting before regulators complete their investigation, said Angela Zhang of the University of Hong Kong. As a result, Didi’s new public investors were badly burned, just as Ant Group’s private investors were in November, when the fintech firm’s $ 37 billion Initial Public Offering was suspended two days before its shares began trading in Hong Kong and Shanghai.
All of this quenches both the appetite of Chinese companies for foreign listings and the thirst of foreign investors for Chinese stocks, and not just in America. The day after Didi’s ban, the four largest Hong Kong-listed tech groups – Tencent, Alibaba (which is double listed), Meituan and Kuaishou – lost $ 60 billion in market capitalization. The effects on some of the world’s most innovative and value-generating companies of the past decade can be crippling, especially in conjunction with closer scrutiny of Chinese companies by the US government.
U.S. regulators have long sought to force Chinese companies listed on U.S. exchanges to submit audit documents to a watchdog called the Public Company Accounting Oversight Board. In December, Congress passed a law that would require such disclosures with bipartisan support. At the same time, Chinese regulators have refused to allow Chinese companies to make such disclosures, claiming that the audit documents are state secrets. If the stalemate does not ease, Chinese groups could eventually be forced to withdraw from the US list.
So far, there is no sign of easing. Before Didi’s Initial Public Offering, Marco Rubio, a Republican senator from Florida, called on the US Securities and Exchange Commission to block the transaction. He fumed that the flotation funnels were in desperate need of we dollars in Beijing and endangers the investments of American retirees ”. This week he called the decision to let the Initial Public Offering go “reckless and irresponsible”. President Joe Biden is less vehement, but his Democratic Party also wants to curb China’s economic and technological power.
As the symbiotic relationship between Chinese companies and U.S. investors unravel, both will suffer. The former lose access to the world’s deepest capital markets, the latter to some of its hottest stocks. The market value of Chinese companies in America has fallen 6% since the ant debacle last fall that marked a change of mood in Beijing, even as the S&P The Large Business 500 Index gained 30% overall. Didi will not be the last victim. ■
This article appeared in the Business section of the print edition under the headline “In the grip of anxiety”