On June 30, China’s leading ride-hailing firm Didi Global Inc. (DIDI) went public on the New York Stock Exchange. Raising $4.4 billion and closing at a whopping $75 billion valuation on its first day of trading, market analysts were feeling bullish. “If you want to speculate on a Chinese IPO, you’ve got my blessing to bet on Didi,” said CNBC host Jim Cramer. “I would try to get as many shares as you can.”
Those who followed Cramer’s advice may be second-guessing themselves now. Less than 48 hours after Didi’s public market debut, Chinese regulatory authorities blocked the application from adding new users in China (its core market), citing a review of the firm’s cybersecurity protocols over national security concerns. Just a few days later, Chinese regulators doubled down, ordering all mobile phone operators in China to remove the Didi application from their app stores.
If U.S. investors were already feeling cautious about putting their capital into Chinese technology companies, then the dizzying Didi crackdown comes as a flashing red warning light.
In recent months, China’s government has initiated a widespread crackdown on the independence of private firms, particularly those in the technology sphere. The first major sign of this shift occurred last November, when regulators scuttled the IPO of fintech firm Ant Group -- an offshoot of e-commerce player Alibaba Group (BABA) -- after Alibaba CEO Jack Ma publicly criticized China’s financial regulatory system. In turn, Chinese authorities introduced new online lending rules that upended Ant Group’s business model. Then in December, Chinese authorities opened an antitrust investigation of Alibaba that eventually culminated in a $2.8 billion fine.
Ever since, China’s regulatory push has extended beyond fintech across a variety of technology-enabled sectors. Internet giant Tencent (TCEHY) was hit with a $1.5 billion fine in April for not properly reporting investments and acquisitions for antitrust reviews. Other Chinese tech firms were fined for similar reasons, including JD.com (JD), food delivery provider Meituan (MPNGY), and TikTok parent ByteDance.
Naturally, investors are worried about these antitrust interventions and how they might affect the underlying businesses. Take Ant Group, which is reportedly seeking to address officials’ concerns by partnering with state-owned entities to create a credit-scoring company. If the fintech giant does still go public, its reliance on Chinese bureaucrats weakens its value and growth potential, according to experts. “The unique big data advantage of the platform companies like Ant is gradually disappearing,” Winston Ma, a former director of China’s sovereign-wealth fund told Barron’s.
A similar dynamic holds true for Didi. Chinese regulators have already showed their willingness to take the application offline and prevent new users from signing up; there’s no reason they won’t do so again in the future. This creates a market condition of permanent uncertainty (words investors never want to hear) regarding Didi’s ability to operate and grow. Indeed, it’s hardly unfathomable to think that China’s government could, at some point, co-opt the firm entirely. The same can be said of any Chinese tech firm.
Worse yet, the data-focused clampdown on Didi seems to have been a harbinger of growing activity from China’s Cyberspace Administration, which said on Thursday that it had opened investigations into two additional large Chinese firms: the recruiting site Kanzhun (BZ) and the “Uber for Trucks” logistics firm Full Truck Alliance (YMM). As U.S. investors know, data is worth its weight in gold in today’s information economy; firms’ data sovereignty is crucial for attracting investor capital.
In sum, as U.S.-China relations continue to deteriorate, globally minded investors need to be careful about where they put their money. It may not be where they think it is.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.