Chinese ride-hailing company DiDi’s announced delisting from the New York Stock Exchange effectively ends the Chinese technology industry’s parade of public offerings in the United States.
DiDi’s run as a listed company has been tumultuous. Its stock has lost nearly 50 percent of its value since its initial public offering (IPO) six months ago.
While DiDi stated that it came to the conclusion of delisting on its own, that decision wasn’t the company’s to make. The firm reportedly went ahead with an IPO without obtaining approval from Chinese regulators, even after those regulators had voiced concerns around certain “cybersecurity” issues about its data storage.
How legitimate those concerns were is beside the point. After reports surfaced over the past few weeks that the Cybersecurity Administration of China (CAC) was pushing DiDi to delist, its fate as a U.S.-listed firm was sealed.
DiDi is planning to list its traded shares in Hong Kong after pulling out of New York.
The SEC laid out rules in early December that Chinese companies listed in the United States must open their books for examination by U.S. investors or face delisting within three years. The investment community is holding out hope for an eventual agreement between the SEC and Chinese Communist Party (CCP) authorities to share audit work papers, but there has been very little progress on that front.
Instead, Beijing appears onboard with pulling its companies out of the United States. The CAC has introduced increasingly strict rules governing Chinese companies pursuing foreign IPOs on the basis of data and national security concerns.
While Chinese entrepreneurs want to cash out via foreign IPOs, CCP leader Xi Jinping wants to keep companies—and by extension, the wealth of their founders—in the country, where they can be monitored and controlled. “Data security” could just be an excuse. However, Xi’s underlying policy has been steadfast and clear. China wants foreign capital, but it must be by the CCP’s rules.
We’ve also seen Hong Kong’s transformation from a mostly free, de facto beachhead of foreign capital to a Chinese city fully within the grip of the CCP. Beijing introduced separate rules for companies pursuing a listing in China and Hong Kong and for those doing so outside of mainland China earlier in 2021. The result? Only one Chinese company priced an IPO in the United States during the second half of 2021.
The future of existing U.S.-listed Chinese companies appears to be increasingly precarious. Many are already pursuing a dual listing in Hong Kong to make a future U.S. delisting less painful.
On the VIE structure, which has had its longevity questioned, Beijing recently suggested that it could remain as a viable structure for foreign capital to flow into Chinese companies. But its future could be restricted to non-technology companies, as tech companies may be forced to stay home.
What does that mean for U.S. investors?
Beijing is taking the initiative to decouple from a stock market listing perspective. There will be tighter control over how Chinese companies can raise foreign capital. Few, if any, Chinese companies will IPO in the United States going forward.
U.S. investors will still be able to invest in China if they choose to do so. Investment firms should have specific China-focused funds to provide investors wanting exposure to China with a deliberate, ring-fenced allocation of exposure that can be analyzed separately from the rest of their portfolios.
And investors need to demand returns equal to the risk they’re taking. Investing in China will be more difficult, but given the risk, it should have always been this way.
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