Billions of dollars destroyed: why Beijing is spoiling the stock market party

China’s leadership is taking action against domestic companies that are listed on the US stock exchange. Billions of dollars of market value are therefore vanishing into thin air. But it looks like Beijing will tighten the measures.

Cheng Wei had every reason to celebrate vigorously. The boss and founder of the Chinese driver service broker Didi Chuxing had successfully carried out the company’s IPO in New York at the end of June, Didi had raised $ 4.4 billion and was valued at around $ 80 billion at times. But shortly thereafter, a bad-tempered surprise visit appeared, which abruptly ended the party – China’s national cyberspace regulator, the CAC.

It banned app stores in China from continuing to offer the Didi app for download. The share price then collapsed by around a quarter. The official justification of the CAC: data protection. Didi illegally collected personal user data.

As severe as the consequences are, the step did not come as a complete surprise. Cyber ​​supervision advised Didi to postpone the IPO. The CAC asked 30 tech companies, including Didi, for information in April – a clear warning. “We cannot guarantee that our information will satisfy the regulatory authorities,” said Didis’ prospectus. The company went public anyway – and was punished by Beijing for it.

The country’s leadership has been taking action against large Chinese technology companies for a long time. In November last year, after pressure from the authorities, the fintech Ant canceled the IPO in Shanghai and Hong Kong at the last minute – it should have been the largest IPO so far. Ant, to which the Alipay app, which is widely used in everyday life in China, belongs, had apparently become too big and uncontrolled for the regulators with their gigantic credit business. Ant is the financial ecosystem of the Chinese online giant Alibaba, which the authorities are also taking action against. In the fall of 2020, Alibaba founder and multi-billionaire Jack Ma disappeared from the public for a time after publicly criticizing Chinese financial regulation. In January he reappeared and announced that he wanted to do even more than before for charitable purposes.

Beijing hits the mark

The background to the action against Alibaba and Ant, for example, is the efforts of the leadership of the Communist Party to curb the strongly increased influence of private Chinese tech companies and their founders on the economy of the People’s Republic – President Xi Jinping sees them as endangering both financial and political stability .

The punishment of Wei and Didi is another level of escalation. In the meantime, it is also about keeping China’s tech companies out of the US capital market – and the blow against Didi did not fail to have its effect. The first Chinese tech companies have put their US stock market plans on hold, including the Tiktok parent company Bytedance and the medical data service provider LinkDoc.

Meanwhile, Beijing is taking action against companies that are already listed in New York. The truck brokers Yunmanman and Huochebang and the recruitment agency Boss Zhipin are affected. Like Didi, the three companies are no longer allowed to accept new customers.

China’s leadership is not just about control. She also fears that Chinese companies traded abroad could be forced by the local authorities to make their growing amounts of data available. Beijing absolutely wants to prevent that. For this reason, Chinese companies with data from more than one million users will in future have to undergo a security check before they can be listed on a stock market abroad.

Wang Wenbin also commented on the fear of what will happen to the growing amounts of data from Chinese technology companies abroad. The Beijing Foreign Ministry spokesman had described the United States as the “greatest threat to global cybersecurity” at the beginning of July. He accused the local authorities of data theft and invasion of privacy. “It is the US that forced companies to install backdoors and obtained user data.”

China tightened controls

That is why China is also restricting the lucrative construct that Chinese companies like to use to go public in the US, the so-called VIE (Variable Interest Entities). They were created around two decades ago to circumvent restrictions on foreign investment by Chinese companies in sensitive industries such as media or telecommunications. For this purpose, companies set up an offshoot in tax havens such as the Cayman Islands or the Virgin Islands. This new company will be made the sole beneficial owner of the original company, which will continue to operate. This construct allows investors to buy into Chinese companies without having to take into account any restrictions on foreign participation.

So far, the Chinese government had tacitly accepted this, as it gave companies in the People’s Republic access to foreign capital. The US has been an important source of funding for Chinese companies over the past decade. According to the data provider Refinitiv, the record amount of 12.5 billion dollars has been collected from a total of 34 issues since the beginning of this year. Last year there were only fourteen debuts for a total of $ 1.9 billion.

In the future, Chinese companies will have to have government approval before they go public with such a structure. It looks like such permission will be the exception rather than the rule.

Beijing’s price tightening is already leaving its mark: According to the “Economist”, the market value of the four largest tech companies listed in Hong Kong – Tencent, Alibaba, Meituan and Kuaishou – fell by a whopping 60 billion dollars in one day after the Didi ban.

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