It was a head-spinning week for some of China’s largest tech companies.
What began as a broadside against Didi following the ride-hailing giant’s US IPO quickly morphed into a new front in Beijing’s ongoing tech crackdown. This time, the emphasis is data.
The reinvigorated regulatory blitz knee-capped Chinese internet shares. One gauge shed $200 billion in market cap in just five sessions. Despite a rebound on Friday, the Hong Kong Tech Index logged a weekly loss of nearly 6%. It’s down ~10% in two weeks. The underperformance versus big-cap US tech, which began in February, is accelerating (figure below).
Beijing’s abrupt post-centennial assault appeared designed to discourage US listings. That’s something Xi and Washington’s China hawks have in common. Neither is enthusiastic about large Chinese companies raising capital stateside. US lawmakers fret about a lack of accounting transparency and opaque corporate governance, while Beijing fears data on Chinese citizens may fall into foreign hands.
On Saturday, China took another step down the road to restricting overseas listings when the country’s cyberspace regulator posted “revised” guidelines applicable to all “operators who have personal information on more than 1 million users” and intend to list abroad.
Such companies would be required to undergo “a cyber security review.” One imagines that’ll be an onerous process.
Among other things, Chinese regulators will assess “the risk of core data, important data, or a large amount of personal information being stolen, leaked, destroyed, and illegally used” and, crucially, “the risk that key information infrastructure, core data, important data, or a large amount of personal information will be affected, controlled, or maliciously used by foreign governments after listing in foreign countries.”
In their reporting, Bloomberg called this “one of the most concrete steps taken yet to restrain the ability of technology firms to raise capital in the US through [the] Variable Interest Entity model that the likes of Alibaba, Baidu and Didi have adopted.” Sources said Beijing may also require companies that previously listed overseas to ask permission before selling additional shares.
At least three Chinese firms have already scrapped US IPOs.
No matter what gauge you care to consult, the picture is bleak. The Golden Dragon Index, for example, is down an egregious 36% from its February highs and has fallen in five of the last six weeks (figure below).
There are countless similar charts. They all tell the same story.
You’ve probably seen plenty of commentary emanating both from professional analysts and home-gamers suggesting there are “bargains” to be had amid the rout. That may be true. But you shouldn’t harbor any delusions. This isn’t a falling knife in the traditional sense. It’s not merely a matter of timing it correctly so that you grab the handle, not the blade. The fundamentals don’t matter and neither do the technicals. All that matters is the Party.
As one Hong Kong-based analyst put it, “it’s impossible to determine a reasonable or acceptable discount at this stage, given the uncertainties related to the extent of regulatory tightening.”
I’ll confess to taking a bit of pleasure in documenting these types of situations. It’s conceptually similar to what happens when purported EM “experts” (many of whom have years of experience trading EM FX and debt) take Turkey’s Erdogan at his word. If you refuse to acknowledge the realities of autocratic regimes on the misplaced notion that capital markets can impose “discipline” on dictators, you’ll be perpetually disappointed.
In the same Saturday statement, China said that in addition to the explicitly enumerated considerations for companies seeking to list abroad, the regulator will also consider unspecified “other factors” that may have the potential to “endanger national data security.”
In effect, that means Beijing can block overseas tech listings on any excuse the Party cares to conjure — or for no reason at all.
