Shares of Chinese ride-hailing business Didi are off 22% this morning after the company was hit by more regulatory activity over the holiday weekend. The recently public company traded as high as $18.01 per share since it held an IPO last week; today, shares of Didi are worth just $12.09, off around a third from their 52-week high.
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The decline in value follows a review by a Chinese cybersecurity agency that led to Didi being unable to onboard new users, a decision that arrived as last week rolled to a close.
Over the weekend, Didi was hit with more regulatory action. This time, the Cyberspace Administration of China said, via an internet translation, that “after testing and verification, the ‘Didi Travel’ App [was found to have] serious violations of laws and regulations in collecting and using personal information,” which led the agency to command app stores “to remove the ‘Didi Travel’ app, and required [the company] to strictly follow the legal requirements and refer to relevant national standards to seriously rectify existing problems.”
Being yanked from relevant app stores was enough for Didi to alert investors that its mobile app “had the problem of collecting personal information in violation of relevant PRC laws and regulations.” Didi said that the change in its app availability “may have an adverse impact on its revenue in China.”
Understatement of the year, I reckon.
But there’s more going on than what Didi is enduring. As CNBC reported:
Three days after China announced a cybersecurity probe into Didi, the same agency announced an investigation into businesses held by two Chinese stocks that went public in the U.S. in the last month — Full Truck Alliance and Boss Zhipin, which filed under the name “Kanzhun.”
It’s a mess out there.
But not one that wasn’t somewhat foreshadowed. As The Exchange explored Friday, Didi had a huge number of warnings in its F-1 filing that its relationship with the government could prove fickle — and deleterious to its operations.
Our read at the time was that it was somewhat shitty of the Chinese government to whack a company right after its IPO raised capital from foreign shareholders. However, there’s more to the story than just that. The Wall Street Journal reports that “China’s cybersecurity watchdog suggested the Chinese ride-hailing giant delay its initial public offering and urged it to conduct a thorough self-examination of its network security.”
Didi chose to pursue its public offering instead. The rapid-fire pace of the company’s filing, pricing and IPO now look a bit less innocuous than they did. Didi filed on June 10, priced on June 29 and went public on June 30. Was the company’s rush to debut merely market timing, or was it more regulatory arbitrage? I suspect some lawsuits will sort that out.
For China-based companies hoping to list in the United States, the market likely just got much, much colder. With the Chinese government making noise to the same effect, we could be seeing the near-term conclusion of China-based IPOs in the U.S.
Which is reasonable. With China’s regulatory climate both murky and rapidly evolving in recent quarters, it’s hard to know what’s coming for the tech industry, let alone individual companies. Business won’t get easier, and it’s unclear how quickly things may change.
Notably, the regulatory push comes after venture capital activity in China rebounded. Per a KPMG report, venture capital activity in the country reached a quarterly maximum in Q2 2018, when $43.7 billion was invested. Investment declined to just $10 billion in Q1 2020, though Chinese venture capital activity has since rebounded to $27.9 billion in Q4 2020 and $24.6 billion in Q1 2021.
Those figures could retreat again if the market decides that the Chinese government is making business hard enough that deploying capital elsewhere could prove more lucrative.
There’s more going on in the Chinese market worth our attention. Weibo, often called China’s Twitter, could be going private in a deal that puts a huge premium on its equity. The company is listed on the Nasdaq, making its potential move toward private status a decision that would further limit Chinese companies on U.S. exchanges.
A “Shanghai-based state company” could take part in the deal, per Reuters, and the transaction may help Alibaba get out of its Weibo stake.
That this news landed today doesn’t feel like a coincidence. It feels part and parcel with a larger regulatory effort by the Chinese Communist Party (CCP) to exercise ever-greater control over the Chinese economy and the minds of the Chinese people.
The CCP is willing to sacrifice business results for control. If that sounds a bit dramatic, note that there was chatter when Didi was first hit by the cybersecurity regulatory body that part of its sin was going public too close to the CCP’s 100th anniversary, an event that the party used a propaganda opportunity.
Singling out China regarding tech regulation may seem unfair. After all, India is trying to bring Twitter to heel, Nigeria banned the microblogging service, and U.S. officials are, variously, trying to either break up Big Tech companies or force them to behave in ways contrary to what the firms consider best practices.
But the economies of India and the U.S. are fundamentally different than China’s, something that the country’s ruling regime has made amply clear in recent days.