Has China's crusade against Big Tech come to an end? It would seem so, with regulators wrapping up their year-long investigation into the ride-hailing app DiDi Global (DIDIY) by leveling penalties against the company.
DiDi Global has been fined C¥8.026 billion (US$1.2 billion) for violating network-security and data-security laws, the Cyberspace Administration of China (CAC) announced on Thursday, sending shares in Didi sharply higher.
The company's co-founders, Chairman and CEO "Will" Cheng Wei and President "Jean" Liu Qing, have also each been fined C¥1 million (US$148,000).
The fines, which to the CAC mark the "conclusion of the network-security review," end a year-long saga for DiDi Global. Days after its initial public offering on June 30, 2021, it was ordered to cease signing up new customers, while the authorities forced app stores to remove 25 of DiDi's apps from app stores. The regulatory curbs sent the shares plummeting.
Beijing is now expected to allow DiDi to sign new customers and offer its apps once again. But those details and any timeframe have not yet been confirmed.
DiDi delisted its shares under the ticker DIDI from the New York Stock Exchange on June 13. They were trading at US$2.46 at the time, down 82.4% from their IPO price of US$14. They had traded at that kind of level ever since China first penalized the company.
The stock is now trading over-the-counter in the United States. The announcement of the fines has resulted in a surge in the stock, as it has when companies such as Alibaba Group Holdings (BABA) were slapped for monopolistic behavior. The OTC counter DIDIY has shot up 29.7% since Monday's close, moving a leg up each day this week as word of the concluding investigation filtered through.
Likewise, shares in Alibaba rallied when it was fined US$2.8 billion in April 2021, a record in China, for practices such as forcing merchants to sign exclusive contracts only to sell goods on its Taobao and Tmall platforms. The fine was based off 4% of the company's revenue, designed to be eye-catching but easily funded out of cash on hand.
In April 2021, Chinese financial regulators summoned 13 companies, a Who's Who of the Chinese tech sector, for showdown talks. The breadth of the attack demonstrated the full extent of Beijing's crusade against Big Tech.
Besides Alibaba and DiDi, other companies targeted include WeChat superapp operator Tencent Holdings (TCTZF) , e-commerce site JD.com (JD) , Web-browser operator Baidu (BIDU) , grocery app Meituan (MPNGF) , mobile-phone maker Xiaomi (XIACY) , Twitter-like platform Sina (SINA) , electronics retailers Suning SZ:002024 and Gome (GMELY) , online-travel agency Ctrip (TCOM) , browser and software maker 360 DigiTech (QFIN) , and the unlisted operator of TikTok, ByteDance.
All those shares are worth watching as the companies are fined one by one, ending their individual investigations. Chinese President Xi Jinping's Maoist crusade against the private sector, which has worried any entrepreneur or business owner in China, has taken a back seat after causing significant disruption to the economy. Xi has this summer turned his attention away from the economy, leaving that in the hands of economists and ministerial specialists, while Xi focuses on combatting persistent Covid outbreaks and on winning reelection to a third term this fall.
The entire DiDi episode has been embarrassing for foreign-listed Chinese companies, and worrying for overseas holders of their shares. DiDi's US$4.5 billion IPO was very high-profile, the largest stock offering in the United States by a Chinese company since Alibaba's then-record US$25 billion IPO in 2014. So to suddenly see its wings clipped and its shares sent to a fraction of their listing value was shocking.
DiDi Global said in December that it would abandon its U.S. listing and look to relist in Hong Kong. It has not yet set a timetable for the Hong Kong listing, with the company waiting for the investigations into it to conclude.
The action against DiDi so soon after its U.S. share sale demonstrated that the Chinese Communist Party will take any action that it deems necessary, to the detriment of shareholders, with little or no warning. The after-school tutoring industry suffered even harsher treatment when in July 2021 the Chinese government banned companies from offering for-profit classes during term time.
That torpedoed a US$120 billion industry in China, overnight. The shares of U.S.-listed TAL Education (TAL) and New Oriental Education & Technology Group (EDU) plummeted, leaving them down some 90% from their highs in February 2021. Both have shown a little life since this spring as the companies look to recast themselves with foreign-language classes and other offerings aimed at adults.
The action against DiDi came after it satisfied the existing securities regulations for Chinese companies seeking to go public overseas, but ignored a "suggestion" from cyberspace regulators that it delay the stock offering. It broke an as-yet-unwritten, non-existent rule for tech companies, with the Beijing government newly concerned about data security and the prospect of Chinese dot.coms falling into the hands of foreign ownership. Beijing has since made its expectations more concrete.
China's stock watchdog had long tolerated the process of Chinese tech companies listing on U.S. markets using a "grey area" legal dodge. The companies would create a Cayman Islands or Virgin Islands structure called a Variable Interest Entity. This offshore VIE would sign a commercial contract to receive the business-operations proceeds of an onshore Chinese company, typically one in a sector such as cyberspace where direct foreign ownership of a Chinese company is not allowed.
DiDi also went public at a time when the U.S. Securities and Exchange Commission is pushing to be given access to the accounts of U.S.-listed Chinese companies. Chinese authorities have barred any foreign accountants, including the Hong Kong arms of the Big Four firms, from reviewing the books of Chinese companies. The logic is that this access might reveal "state secrets," since many Chinese companies are state-owned enterprises or feature state control in some form, even if they have sold shares to the public.
And data security became a prime concern of China. Since the Chinese government can demand access to any data compiled inside Chinese borders, it expects other governments to be able to command similar access, although that's unlikely in the West. Beijing is also concerned about the sharing of Chinese tech-company algorithms abroad, clearly feeling foreign investors could demand tech transfer.
The heat has, however, sapped from the bruising trade war between the United States and China, which if anything has entered a cold phase. Presidents Joe Biden and Xi are due to speak to each other "within the next 10 days," Biden said yesterday. Biden's economic team has been reviewing whether to ease any of the trade tariffs put in place on Chinese goods under the Trump administration.
Trade duties are ultimately paid by U.S. importers and U.S. consumers, as I noted when the Chinese tariffs were imposed. So easing them could help combat inflation, as U.S. Treasury Secretary Janet Yellen has noted, although the effects would be slight compared to the current 9.1% inflation rate.
The policy picture on both sides of the Pacific is therefore currently a lot more positive for multinational Chinese companies than it has been for several years. The conclusion of the DiDi fiasco ends a painful chapter for U.S. investors caught in the policy currents and countercurrents generated not by any underlying strength of DiDi's business but by political concerns.
