Will DIDI Set Off US China Capital Market Decoupling? The Story Behind Didi’s Disastrous IPO

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Simone Gao: Hello. Welcome to Zooming In China, I am Simone Gao.

On the final day of June, ride-sharing giant DIDI Global, China’s equal to Uber, made its initial public offering on the New York Stock Exchange. This listing had been years in the making, with industry insiders whispering about such a move nearly five years ago. But once the decision was made, the filing and approval moved at lightning speed with help from U.S. bankers backing the listing, including Goldman Sachs, Morgan Stanley and JPMorgan Chase.

For the first two days, DIDI’s IPO was a global success, emerging as the largest Chinese IPO on the U.S. stock market since Alibaba’s offering in September 2014. By the second day, Didi’s shares rose 16%, leading to a valuation of the company at about $80 billion. Then came the international firestorm.

The Chinese government, taken by surprise by this public offering, struck back quickly. The Cyberspace Administration of China, or CAC, announced on July 2nd that Didi would be placed under cybersecurity review. During that review, new users would be banned from accessing the app. 25 of the company’s other apps, accusing them of violating laws surrounding the collecting of personal information. On Sunday, the CAC announced that the Didi app would be removed from all Chinese app stores.

Following the announcement of that review and restriction by the CAC, investors left in large numbers, leading to a 5% drop on Friday and a 25% drop when markets opened on Monday morning. While the stock has recovered some of those losses, it still sits well below its success prior to the CAC review.

At its core, this is a conflict over data: who has it, who controls it, who can access it, and how it is used. Despite operating in 16 countries, most of Didi’s business comes from China where it controls nearly 89% of the rideshare market. With a market that size comes mass amounts of data, including sensitive data displayed on its map function. Even after the CAC ban, Didi has 377 million annual existing users and 13 million drivers who are still able to use the app.

After their early June public filing, Didi set a goal for an early July initial offering. Because they are incorporated in an “offshore tax haven,” they were not required to seek government approval for an overseas public offering. Still, Didi informed China’s National Development and Reform Commission and Beijing cyberspace regulators of their intent. Chinese regulators urged Didi to pause the offering over concerns that IPO documents required by U.S. regulators could provide sensitive Chinese data. One point of concern may have been the U.S. law passed last year named Holding Foreign Companies Accountable that requires Chinese companies to turn over audit documents including original accounting books for regular review.

Even though that law was not fully implemented before July 12th which has already passed Didi’s IPO date, the Chinese authorities worried about the documents submitted after the company's IPO since the U.S. regulators would review audit documents every year.

Back to Didi.

So Didi did not commit to postponing the sale, saying only that they would consider the Chinese regulators’ request. Government officials claimed they did not intend to block the sale but wanted a chance to review Didi’s records. But rather than pause the IPO, Didi sped up the process, setting a sale date for June 30th.

It is not clear why Didi chose that path. One speculation is that Didi tried to finish the IPO procedure before the Holding Foreign Companies Accountable law was fully implemented so they didn’t have to provide sensitive documents required by the new law, at least for the IPO.

Didi’s only public statement has been that they were not aware that Chinese regulators would place them under review. But there is reason to believe that Didi was also concerned about regulators blocking the sale, and they had good reason to be concerned. The Chinese government blocked the Shanghai and Hong Kong IPO of the Ant Group last November, expected to be the largest IPO in their history, two days before trading was to begin. And, as several Chinese tech executives have said, despite the regulatory pushback from Beijing, this will likely still be a win for Didi.

The CCP has not taken this loss of control well, though, and the reigns placed on Didi have been added to other recently listed companies as well. Full Truck Alliance, an Uber-like service for freight trucks who had their U.S. IPO on June 22nd, and Kanzhun, an online job recruitment service whose IPO was one day later, have now been ordered to reject new user registrations and submit to a cybersecurity review.

A tightening of CCP control over the Chinese tech sector has been a long time coming. After the debacle with Didi, that control is growing. On Saturday, the CAC posted a proposed revision to their Cyber Security Review Measures on their website. The revised measures would compel companies with more than one million users and those “newly listing on foreign markets” to secure CAC approval and turn over IPO materials for review before listing shares in those markets. The CAC has made that proposal available for public comments until July 25th, though public feedback will mean very little in CCP-controlled China.

Because Didi has been classified by Chinese law as a “critical infrastructure provider,” they are viewed as holding national-security level data. The revisions to China’s cybersecurity law make that clear, nearly all of them centering on the holding and transmission of data. To the “Cybersecurity Law of the People’s Republic of China,” they have added the “Data Security Law of the People’s Republic of China.”

The earlier law applied only to those “procuring network products and services,” but will now also apply to “data handler, conducting data handling activities that influence or may influence national security.” As part of that review, companies will have to provide a written declaration; an analytic report on the possible influence on nationa lsecurity; a procurement document, agreement, or contract to be signed; and IPO materials provided for submission. Publicly, the CAC says their concerns are that “core data, important data or large amounts of personal information” might be “stolen, leaked, damaged, or illegally used or exported” and that the data of Chinese companies could be “affected, controlled or maliciously exploited by foreign governments” once listed. What they are not saying, though, is that they are equally concerned with the power and position their online platform giants, like Didi, will gain through these added investments. These Chinese tech giants are simply not allowed to exist like before. Their power has to be reined in.

As Chinese companies grow more powerful, they become a direct threat to the regime, and the CCP has consistently squashed any threat to its power. But TS Lombard’s expert on China’s economy, Rory Green, wrote in a recent note that “crackdown on Didi opens a new front in China’s tech assertiveness: this is a question of sovereignty. The battle for data sovereignty is beginning and China is already fully motivated.”

It is not clear how long the crackdown on Didi will continue nor how many future Chinese companies may be affected. What we do know is China’s online “platform economy” has joined Big Tech under the hawk-eyed watch of the CCP regime. As China continues to strong-arm the giants of their corporations—including Didi, Ant Group and, recently, even Tencent when they attempted a merger the CCP believed would give them too much power in their sector—Are we going to see a China that will go back to the old days of the planned economy where the government controlled everything? Let’s wait and see.

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