Chinese companies, particularly those in tech-linked fields, are rethinking plans to go public in the United States in response to the Didi Global (DIDI) listing fiasco.
The medical-data company LinkDoc Technology issued a prospectus on July 7 for a U.S. initial public offering. The listing has already been approved by Nasdaq under the ticker (LDOC) . But it has now shelved plans for a U.S. listings, Reuters reports, after seeing what Didi has gone through.
Didi and two other Chinese app operators have been blocked from signing up new customers shortly after they sold shares to investors in the United States, as I outlined on Monday. The finger pointing and the class-action lawsuits have begun.
In retrospect, Didi obviously rushed through its offering. The company "forced its way" to go public without completing a "thorough" data-security assessment with the Cyberspace Administration of China, a regulatory source tells the South China Morning Post.
But that kind of review is new, governed by an office that's only a year old, and it's not even clear what you have to do. It's not an "institutionalized part of the listing process," the source says. Translation: Who knows what you have to do? But Didi got it wrong.
Weeks before the Didi IPO, the cyberspace administration "suggested" that Didi delay the offering, according to The Wall Street Journal. Officials were concerned about the company's huge reams of data falling into the foreign hands due to public disclosures. But there was no official word, no "Yea" or "Nay" either way.
The fallout suggests new U.S. listings of Chinese companies will stall, while existing companies come under pressure. The S&P/BNY Mellon China Select ADR Index, which tracks Chinese companies listed in the United States, has fallen 12.7% since Didi went public, and 8.8% once the company's ban on new customers came to light over the July 4 long weekend.
It is not clear why a stock listing would pose a Big Data challenge. It's not like Apple (AAPL) shareholders get access to all our iPhones, or that owning Microsoft (MSFT) shares somehow gives you insight into what its customers are doing with its software.
Didi compiles extensive information on the trips its drivers run, and even records audio of passenger trips, security measures bolstered after two riders were murdered. But it's hard to imagine how any of that information would get shared outside the operating company. Beijing officials may be concerned about activist investors hijacking the company, or even a hostile takeover of Didi.
Didi did not help itself in 2015, when it ran a review in conjunction with state news agency Xinhua about usage at government ministries. It was a playful story that surely worried those in power. The Ministry of Public Security, which is in charge of the police, was the busiest branch of government, with 1,327 rides booked in just one day. The anti-corruption agency was one of the least-busy. Workers at the National Development Reform Commission were getting into the office early, with the most drop-offs between 6 a.m. and 8 a.m., while Ministry of Science and Technology staffers were clock watchers who leave as soon as their official day is done.
Chinese policy is often unannounced. When visas get restricted for gamblers from Guangdong Province to cross the border to neighboring Macau and hit the tables, there's no public statement. People just start getting rejected for a visa they used to get. Junket operators running trips over the border have to work out what's allowed.
After the fact of the action against Didi, China's State Council, its equivalent of a ministerial cabinet, issued a new policy directive publicly to toughen rules on overseas listings, as I explained on Wednesday. The changes would give domestic securities regulators oversight over international stock offerings, likely by requiring those companies to file listing documents in China as well.
The cabinet says the policy statement was already doing the government rounds. But those rounds go round and around. Even the "details" provided in the policy directive are vague. The notice says the government will "improve" laws on "cross-border data flow and the management of confidential information," though it's not clear how.
The Chinese Communist Party has been occupied with the celebrations starting July 1 in honor of the centenary of its founding. So Didi may have felt they went through the normal process and even got assurances that their listing was in line with previous tech offerings from Chinese companies overseas.
There were no such complaints, for instance, when Alibaba Group Holding (BABA) set a record with its IPO in 2014. Didi's US$4.4 billion IPO was the largest Chinese listing in the United States since then.
What's changed? Well, there's far more concern about and understanding of the power of Big Data. But more than anything, there's a new Chinese agency to contend with, one that has a different set of concerns from securities regulators.
The Office of Cyberspace Review was only brought into being by new regulations passed last May. It took 12 government ministries, led by the Cyberspace Administration of China, to create and sign off on the new cyberspace law that created the review office. The existing procedure for Chinese companies listing offshore was established in 2005, by the State Administration of Foreign Exchange.
The Chinese Communist Party is an enormous bureaucratic entity. Once you're stuck in the system, it can be impossible to get out.
How confusing can it be? Besides the regulatory body, the Cyberspace Administration of China, the new Office of Cyberspace Review was carved out under the auspices of the Chinese Communist Party's Central Cyberspace Affairs Commission. Which sounds like almost exactly the same thing.
You've got the party's cyberspace entity, the regulator's cyberspace entity, and then a cyberspace review office, all looking at the whirlwind changes in the tech world and adapting policy in real time.
Oh, and those 11 other ministries? That brought in the Ministry of Finance, the Ministry of Commerce, the central People's Bank of China, the State Administration for Market Regulation, the National Radio and Television Administration, the National Administration of State Secrets Protection, the State Cryptography Administration, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security and the Ministry of State Security.
Try getting every bureaucrat up and down that chain of command to sign off on a stock offering in another country, all while everyone is attending centenary banquets, and doing their level best to climb up the Communist Party hierarchy by being more patriotic than everybody else. A New York listing? Look, we're busy.
The actions against Didi, which has been banned from signing up new customers and had its app removed from app stores, were presented under China's National Security Law, Cybersecurity Law and the Network Security Law. The Cybersecurity Review Office ordered Didi to stop signing up new customers, while the State Internet Information Office, also known as the Cyberspace Administration of China, announced the app store removal.
This is the first time that the Cybersecurity Review Office has taken public action against a company. It followed up the Didi app ban with an announcement that two other Chinese apps, the job site Boss Zhipin.com and its parent Kanzhun (BZ), and the trucking consolidator Full Truck Alliance (YMM) , would also be barred from taking on new customers due to data-security violations. Both went public in mid-June.
The Chinese Communist Party has recently cottoned on to how powerful Big Data can be, and lucrative. It has long looked to use data to monitor and surveil citizens, but now it wants Chinese tech companies to share the treasure trove of consumer data that they glean as they serve customers. Chinese tech companies are resisting quiet calls to hand over their databases, but they won't be able to hold out for long.
Chinese officials are worried about the implications of the Holding Foreign Companies Accountable Act, which became law in the United States last December. Reasonably enough, it insists that overseas companies listed in the United States file the same quality accounts as U.S. companies. One key component is that the accounts must be reviewable by the SEC's accounting arm, the Public Company Accounting Oversight Board.
That shouldn't be a big deal. But China treats public company accounts, and even census data and GDP figures as highly sensitive information - figures that it frankly manipulates to suit the Communist Party narrative. Having access to demographic data from a ride-hailing company could provide greater insight into the real picture on the ground, beyond what the government releases.
On the flipside, the Trump administration viewed the short videos uploaded by TikTok users as some kind of national secret. Both stances are frankly ridiculous, but that's not apparently going to stop regulators on both sides of the Pacific from attempting to restrict the information flow, now that they realize data is valuable in its own right.