China's crackdown on Didi is a 'political move': Analyst

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Yahoo Finance 06 July, 2021 - 10:20am 19 views

Who owns Didi?

When I spoke to Didi Chuxing's founder Cheng Wei in 2018, the one thing that was apparent was that this was a man on a mission. He wanted to take the Chinese firm global, and to offer a new vision of what a company driven by data could make possible. BBC NewsDidi says removal of app in China will affect business

AKIKO FUJITA: But we are starting this hour with those developments, Brian, that we got out of China over the weekend. Shares of Didi really tanking in the session on the back of that. It is down well over 20%. Remember, this coming just days after the company raised about $4.4 billion in that public listing last week.

Brian, we got this one-two punch over the weekend on Friday. We had regulators starting cyber security review into Didi, blocking the company's app from accepting new users. And then you had the same regulators ordering mobile app stores to pull Didi from circulation. And it feels like this is really a quickly evolving story given the news we got out of China this morning. The Xinhua News Agency, which is, of course, the state media, reporting that China is now considering changes to its review of these companies who are listing in the US with a specific focus on data security.

BRIAN CHEUNG: Well, and this is absolutely the biggest story for any Chinese company that's not only listed in the US, but also any sort of company that was thinking about maybe trying to raise capital here in the US equities market. And we'll be talking about this at more length further on in the show. But the idea and the larger question at hand here is, are the Chinese regulators really trying to discourage some of their homegrown companies from trying to raise capital overseas and whether or not this is just one strong-arm way, if you will, of China to get their companies, at least in their country, to list on maybe the Shanghai Stock Exchange or the Shenzhen Stock Exchange.

Now, of course, this is a story that's bleeding into a number of other Chinese stocks as well. There's a number of stocks that are on the move when you take a look at Tencent, for example, moving quite a lot. And then also, you want to pay attention to the story surrounding a company known as Weibo, which is very similar to Twitter. It's kind of the Chinese equivalent of that. There was a report from Reuters saying that the company's chairman had talked about the idea of maybe taking it public, supposedly in conversation with state officials as well.

But the company now issuing a statement earlier this morning saying that's completely false. You can see the stock movement on that stock. WB shooting up on that news despite the clarification from the company. But look, this is causing waves across the Chinese equity space and something definitely worth keeping an eye on in the months to come.

AKIKO FUJITA: Yeah. You mentioned Weibo is one of the two stocks that we're watching-- the Full Truck Alliance and, obviously, the recruitment app, BOSS Zhipin, which has also been caught up in this regulatory scrutiny around US-listed Chinese companies. And I guess for investors here in the US, there are a lot of questions specific to Didi, which is, did they know that this crackdown was coming when they rushed the IPO? And did Didi rush the IPO because, as "The Wall Street Journal" has reported, they were under pressure from some big-name VCs who had backed the company, obviously looking to tap into the capital markets there? So certainly a lot of questions on that front.

But I want to bring in another voice into the conversation, somebody who's quite familiar with this space. And that is Martin Chorzempa, senior fellow at Peterson Institute for International Economics. I'd love to have you break down your analysis of what's been playing out. At the end of the day, what do you think the motivation is for the Chinese government, the regulators, to be cracking down on Didi in this way?

MARTIN CHORZEMPA: Thank you for having me. There is a huge amount of uncertainty in the regulation for big tech at the moment in China. We've seen a huge number of fronts on the privacy angle and cross-border data flows, financial implications of big tech and finance that led to the Jack Maw debacle and the Ant IPO being canceled. So that all is then with the political backdrop of tensions with the United States and less demand for China to need foreign capital to fund some of its major corporations. So I think we see both a backlash against Chinese firms in sensitive sectors listing abroad and an increased focus on data security. It's hard to know how much the latter is founded in real concerns because we don't really know very much about what the investigation has found thus far.

BRIAN CHEUNG: And Martin, as you point out, there are a number of question marks here. But let's take at face value the Chinese concerns about the cybersecurity of these companies. That seems to be the main reason for them throttling the Didi listing here in the United States. And I guess I'm wondering-- it's not just the Didi story, though. We've seen the regulators try to crack down on the increasing scale, as you mentioned earlier with Ant Financial. But we've seen similar stories with Tencent and Baidu as well.

So from a big-tech standpoint, what does the recent news out of China tell you about not just the regulatory stance, but it's really President Xi Jinping's stance towards big tech and just the scale that they've gotten over the past couple of years?

MARTIN CHORZEMPA: Yeah, absolutely. For a long time, it seemed like big tech and China was pretty much immune from regulations, of course, outside of making sure to keep down any discussion that would be politically problematic for China's leaders. The censorship side, there have been zero room for error. But in terms of scale and competition and privacy, there's been relatively limited regulation in that space.

And my sense is that after Jack Ma made his speech at the UN summit in October, it made Chinese leaders consider that these companies could be not only problematic but also politically some sort of threat to the regime, that they have been able to block needed regulations for many years. And once that there's been a political move to decide to crack down on these firms, there's been a flood of regulations that regulators have wanted to implement for so long. But big tech was so influential in China that the regulators weren't able to move forward. And now that the political line has shifted, they're able to shove out all of these rules in short order. That's led to so much uncertainty.

AKIKO FUJITA: Martin, I wonder if we can look at this from a geopolitical context. How much of this is really a tit-for-tat? It's interesting to hear the language coming out of the Chinese side essentially being worried about data being handed over to other foreign entities like the US. That's the same language the Trump administration used when they were talking about the issue related to TikTok. And then you've also got the PCAOB in the US really cracking down on these audits, essentially saying Chinese companies need to undergo the same scrutiny as every other company that's listed in the US. How much of what's happening on the Chinese side is about hitting back against the US on those rules?

MARTIN CHORZEMPA: I don't think very much of it is hitting back against the US. I think what's really being demonstrated here is that China doesn't really need the access to US capital markets that they needed in the past to fund their innovative companies. They think they can do it on their own. And that's led them to not need to take into account so much the needs of foreign investors and the perception of foreign investors of China's regulatory environment. So even post-IPO, they can say, we don't care about that. What we care about is getting the rules that we think we need in the data protection side. And if US investors lose, that's too bad.

What's interesting is that in the Ant IPO case, it was somewhat different because they decided to list in Hong Kong and Shanghai. So if the IPO would have gone forward and then regulators would have cracked down, the people that lost would have been tens of millions of Chinese domestic retail investors. And that is more politically problematic for the regime. So I think that's also one of the differences between these two cases, is who ends up losing and how politically problematic is that for China.

BRIAN CHEUNG: Now, if we switch the perspective from the regulators to company management, at the same time, we've seen these companies decide that, yes, even though there might be this regulatory risk if we do decide to go public in the United States, ultimately, that's the market that we want to do our capital raise in-- not in China, not on the Hong Kong Stock Exchange. So do you think that the lessons learned for other companies that might be trying to go public in the future is just to, yeah, still list in the United States, but just go through all the requisite regulatory hoops, at least in their domestic market, first? Or do you think that this might actually shift the needle towards really, honestly directing these IPOs away from the US markets?

MARTIN CHORZEMPA: I think this really directs the IPOs away from the US markets because the common denominator in all of these companies that have recently been investigated are firms that have recently listed in the United States. That sends an absolutely clear message to Chinese companies. Because really, there are laws and regulations, but China is not a place that really has consistent rule of law implemented by independent courts.

The laws and regulations are what the Chinese government decides they are. And there are all sorts of regimes like the Cybersecurity Review Regime which are essentially a black box. It's very difficult to get any sort of predictability about how these will be applied without knowing the political line. That's ultimately the most important. And now it seems clear that the political line-- these rules and regulatory regimes will be enforced potentially much harder for firms that decide to list in the United States instead of in China. So I anticipate that's going to really cause firms not to want to poke the bear and list in the United States at this point.

(Bloomberg) -- To the world’s investors, the saga over Didi Global Inc. has made China’s biggest tech firms a riskier bet as President Xi Jinping seeks to control one of the country’s most valuable resources: Big data.Didi is by most measures an appealing success story. The firm controls almost the entire ride-hailing market in China, and counts SoftBank Group Corp. and Tencent Holdings Ltd. as major shareholders. Didi was actually profitable in the first quarter, a rarity for the industry. Its

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Didi and Other U.S.-Listed Chinese Tech Stocks Tumble Amid Beijing Crackdown

Barron's 06 July, 2021 - 05:39pm

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U.S.-listed shares in Didi Global and other Chinese tech companies tumbled on Tuesday after regulators intensified a crackdown on the country’s New York-listed technology companies.

Didi Global (ticker: DIDI) stock fell more than 25% on Tuesday after Beijing’s Cyberspace Administration ordered app stores to remove the Chinese ride-hailing giant’s services from its platforms on Sunday

The cybersecurity regulator widened its attack on Monday, launching a review of two U.S.-listed Chinese app makers: Full Truck Alliance (YMM), which operates truck-hailing apps; and online recruiting app Kanzhun (BZ).

The regulator ordered the companies to stop adding users while the investigations were conducted, The Wall Street Journal reported. Full Truck Alliance fell as low as 20% in premarket trading and was still in the red during regular trading, while Kanzhun was down more than 10%.

And on Tuesday, China released guidelines through state-run Xinhua News Agency that would revise rules and strengthen supervision for companies listed in overseas markets, according to the Journal. The additional scrutiny could make it harder for Chinese companies to raise money in the U.S.,

A spokesperson for Full Truck Alliance told Barron’s the company would fully cooperate with the regulator during the cybersecurity process, saying, “FTA is conducting a comprehensive self-examination of any potential cybersecurity risks and will continue to improve its cybersecurity systems and technology capabilities.”

The spokesperson added: “Apart from the suspension of new user registration in China, FTA and its mobile applications maintain normal operation.”

The trio of Chinese app makers went public in the U.S. last month.

Ahead of Didi’s initial public offering, which raised $4.4 billion, reports emerged the company was facing an antitrust probe by China’s State Administration for Market Regulation (SAMR) over whether its pricing mechanism is transparent enough and whether it has been unfairly squeezing out smaller rivals.

Didi made its U.S. debut on Wednesday before attracting the attention of another regulator on Sunday. The cyberspace regulator removed Didi’s Chinese services from their platforms, citing illegal collection of personal data, the Journal reported.

“China is cracking down on big tech, but the decision to remove the app from domestic platforms appears to be timed for maximum impact and embarrassment,” said Markets.com analyst Neil Wilson. “China’s Communist Party is bristling at the number of Chinese companies listing in the U.S. this year, but there is genuine concern at the heart of this—regulators are not impressed with the way Didi and other Chinese tech companies handle data,” he added.

Wedbush analyst Brad Gastwirth struck a similar note, writing that “while Chinese regulators are pointing to Didi’s collection of user data as the impetus for their actions, with the move coming right after its US IPO, there is speculation that China targeting Didi because of its decision to list outside of China.”

In a statement, Didi said that users who had already downloaded and installed the app could continue using it, though it would no longer be available in China.

“The Company will strive to rectify any problems, improve its risk prevention awareness and technological capabilities, protect users’ privacy and data security, and continue to provide secure and convenient services to its users,” Didi said on Sunday. “The Company expects that the app takedown may have an adverse impact on its revenue in China.”

Kanzhun said on Monday it would fully cooperate during the review process. “The Company plans to conduct a comprehensive examination of cybersecurity risks and continue to enhance its cybersecurity awareness and technology capabilities.”

Perhaps not unrelated, Chinese social-media company Weibo (WB) on Tuesday jumped as much as 15% on reports that it’s planning to go private., though the company denied the reports.

The selloff spread across the Chinese tech sector. Alibaba (BABA), which already had regulatory issues of its own, was down 3.2% at $210.80, while JD.com (JD) slumped 4.4% to $72.88, Baidu (BIDU) dropped 4.1% to $188.70, and NetEase (NTES) slipped 3% to $109.96.

Write to Callum Keown at callum.keown@dowjones.com

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