What does China’s Didi departure mean for Chinese tech fortunes in the US?

The Chinese regulatory action against Didi alongside the US government's ongoing scrutiny has been casting a dark shadow over Chinese tech giants abroad.
7 December 2021

What does Didi departure from the US stock market mean for Chinese tech giants? (Photo by SPENCER PLATT / GETTY IMAGES NORTH AMERICA / Getty Images via AFP)

  • China’s Didi and other Chinese technology companies have been under scrutiny at home and abroad
  • The US recently finalized ruling that says foreign companies listed there can be delisted, if their auditors do not comply with requests for information
  • Some 248 Chinese companies listed on US exchanges will be forced to delist within three years if they fail to fall in line with US audit norms

Last Friday, China’s ride-hailing giant Didi Global Inc announced its plans to withdraw from the New York Stock Exchange (NYSE) to pursue a Hong Kong listing instead. The sensational exit came just five months after the company’s debut in the US stock market, a move that angered Chinese regulators.

The departure of China’s Didi also came in the wake of a sweeping regulatory crackdown over the last year that has clipped the wings of major internet firms wielding huge influence on Chinese consumers’ lives — including Alibaba and Tencent. And for those firms listed in the US, they have been besieged by authorities and regulators from both Beijing and Washington.

Just a day before Didi’s announcement, US market regulators had adopted a rule that allows them to delist foreign companies if they fail to provide information to auditors. The law was first passed in 2020, after Chinese regulators repeatedly denied requests from the Public Company Accounting Oversight Board (PCAOB).

The board was created in 2002 to oversee the audits of public companies, and to inspect the audits of Chinese firms in that list and trade in the US. Securities and Exchange Commission chairman Gary Gensler said, “While more than 50 jurisdictions have worked… to allow the required inspections, two historically have not: China and Hong Kong.” 

In a recent opinion piece by The Global Times, a newspaper close to the Chinese Communist Party, the writer stated that “If the US sets unequal conditions on national security for competition between the two countries by demanding Chinese listed companies hand over audits for inspection so as to spy on China’s internal situation and store huge amounts of sensitive data acquired by Chinese companies, China won’t accept that.”

Didi won’t be the last of China’s crackdown targets

Per US government agency figures from May, a total of 248 Chinese companies are listed in the country, with a combined market capitalization of US$2.1 trillion. Experts and market watchers believe Didi will not be the last Chinese tech giant to delist from the NYSE.

Looking back, the IPO space in the US had an active start to the year when it comes to Chinese companies but they have largely stopped tapping the market since June, due to regulatory and policy roadblocks in both countries. Dealogic data shows that the second half of this year has been the quietest six months for US listings by Chinese firms since the first half of 2017. So far in 2021, listings have totaled nearly US$13 billion compared to US$13.6 billion last year.

Independent research analyst Mitchell Kim told Reuters that already cautious investors would become more nervous about future Chinese IPOs in the world’s largest economy. “U.S. investors may fear investing in Chinese companies, which means Chinese companies may get choked off from accessing U.S. capital. In particular, the Chinese techs could face a greater challenge because so many tech investors are based in the US.”

In fact, a study by McKinsey last year showed that by leaving the US market, Chinese firms are giving up an investor base like no other in the world — with US$52.5 trillion in assets under management, compared to US$7.1 trillion in China.

Who’s next?

Ironically, prior to Didi’s listing, Reuters reported that the Chinese and US authorities are working together to prevent the delisting of Chinese companies from US stock markets. “We don’t think that delisting of Chinese firms from the US market is a good thing either for the companies, for global investors or Chinese-US relations,” the official statement from the Chinese representative reads. “We are working very hard to resolve the auditing issue with U.S. counterparts, the communication is currently smooth and open.”

Shortly after, Bloomberg announced that China plans to ban tech companies using the VIE (Variable Interest Entity) structure from raising capital in foreign markets. And those companies that have already been listed using this scheme will need to make changes to their ownership structure.

Unfortunately, almost every listed Chinese company that can be bought outside China, is listed via a VIE structure. That announcement, if anything, definitely creates additional uncertainty around the Chinese market and companies like Alibaba and Baidu. 

After all, as Bloomberg puts it, “banning VIEs from foreign listings would close a gap that’s been used for two decades by technology giants from Alibaba to Tencent Holdings Ltd. to sidestep restrictions on foreign investment and list offshore. It potentially thwarts the ambitions of firms like ByteDance Ltd. contemplating going public outside the mainland.”