For big Chinese tech companies, the allure of the New York IPO was once obvious: They won access to a much larger capital reserve, higher valuations and more flexible listing rules. But that quickly fades as they are forced to navigate a host of Washington’s audit rules and sanctions, coupled with Beijing’s scrutiny of data collection and foreign listings.
Pressure from both countries has created a “perfect storm” of problems for these companies, according to Alex Capri, researcher at the Hinrich Foundation. He called Didi’s decision a “harbinger of [the] increased fragmentation of global financial markets along geopolitical lines. “
The company has become a poster of Beijing’s crackdown on tech companies after the government banned Didi from app stores just days after it went public in June on the New York Stock Exchange. Authorities at the time accused Didi of breaking privacy laws and posing cybersecurity risks. Their actions were also widely seen as punishment for the company’s decision to go public abroad rather than in China.
A course correction
Moving to Hong Kong marks a sudden correction of course for Didi. Technology giant Ali Baba (BABA) was celebrated two years ago for its stock listing in the Chinese city – a symbolic homecoming for a company that in 2014 traveled to New York to launch the world’s largest IPO.
Several other companies listed in the United States, including Baidu (BIDU), NetEase (NTES) and JD.com (JD), now also trading in Hong Kong, but none of those big names have yet made Didi’s decision to pull out of New York entirely.
They might be forced to reconsider soon.
Beijing has taken steps this year that appear to be intended to discourage Chinese companies from trading in foreign markets, which the country says could pose national security risks.
In the weeks following Didi’s IPO, Chinese authorities proposed that companies with data on more than one million users seek approval before listing overseas. And earlier this week, the Financial Times reported that China is expected to “tightly restrict” the ability of companies that use a structure called a variable interest entity, or VIE, to raise funds from foreign investors.
A VIE involves setting up an overseas holding company that allows investors to own a stake in a Chinese company, which would otherwise be difficult due to restrictions on the mainland. Companies like Didi, Alibaba, Pinduoduo, and JD.com have all benefited from the system.
“The light at the end of the tunnel continues to be the oncoming train,” wrote Jeffrey Halley, senior market analyst for Asia-Pacific in Oanda, in a note this week. “It is increasingly clear that China is giving the option of Hong Kong or bankruptcy with respect to pseudo-listings abroad as the wealth of US valuations is shut down.”
Washington has also tightened the screws on companies in the world’s second-largest economy. Last week, the U.S. Securities and Exchange Commission finalized rules that would allow it to deregister foreign companies that refuse to open their books to U.S. regulators. China has for years rejected US audits of its companies, citing national security concerns.
While Alibaba, Baidu, and JD.com have already hedged their bets by signing up in Hong Kong, there are a few big names that have yet to follow suit. Capri pointed out that the e-commerce company Pinduo (PDD) and manufacturer of electric vehicles Nio (NIO) only trade in New York, and therefore have “a higher degree of exposure than those with diversified trading options”.
“These companies risk becoming pawns in a growing trade between Beijing and Washington,” he added.
Chinese companies’ shares have been hammered in the past year as China crackdown on technology and other private companies.
There are tensions on the horizon that could make trading in New York even more untenable for Chinese companies, according to Capri. He cited the Biden administration’s diplomatic boycott of the 2022 Beijing Winter Olympics and human rights-based sanctions against Chinese entities, which he said “could invite Chinese retaliation that would include to deprive the American financial markets of the lists of other Chinese companies “.
Later, Capri noted that Beijing’s efforts to roll out a government-backed digital currency could create further obstacles for Chinese companies to enter foreign markets.
“The Chinese state will gain full control over financial data and transactional data” through this program, he said. “Chinese companies, by association, will become suspect for data monitoring and privacy concerns. This, in turn, could lead to higher barriers to entry into the United States and other markets.”
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