Xi To Ban Some Overseas Tech IPOs, Erases Celebrities

Chinese tech shares may have managed to close out another tumultuous week with a gain — were it not for reports that Beijing is now set to block US IPOs for companies with vast stores of consumer data.

Citing the ubiquitous people familiar with the matter, Dow Jones said China’s stock regulator this month “told some companies and international investors that the new rules would prohibit internet firms holding a swath of user-related data from listing abroad… via units incorporated outside the country.”

Some companies could still win approval under the new regime. The Journal mentioned the pharmaceutical industry as a sector that might still get the nod to raise capital abroad. (Because pharma companies hold no sensitive data, apparently.)

The rules are being finalized and could be implemented by year-end. Until then, China Securities Regulatory Commission asked companies to suspend IPO plans.

This is just the latest broadside for Chinese tech and appears to be the culmination of efforts that began in July, when Beijing, aggrieved at ride-hailing giant Didi’s insolence, took steps to set up a veto mechanism for tech IPOs. As Bloomberg put it Friday, that “all but froze the once-thriving pipeline of US IPOs by Chinese firms [and] marked one of the most concrete steps yet to restrain the ability of technology firms to raise capital in the US through a Variable Interest Entity.”

The rules described by Dow Jones look like an effort to further codify restrictions.

The Hang Seng Tech Index, which began the week with a rousing rally after falling nearly 50% from its February peak, gave up a gain of as much as 2%. Alibaba fell nearly 4%, erasing what would have been the first weekly gain in three (figure below).

Although the Hong Kong tech gauge still managed to post its best week since February, snapping a five-week losing stretch in the process, the rebound already looked like a dead cat after stalling on Thursday. Friday’s news wasn’t “surprising,” per se, but it did underscore that “the all-clear signal is still some ways off in the ongoing Chinese regulatory reform,” as one analyst put it, in remarks to Bloomberg.

On Thursday (in the “dead cat” article linked above), I mentioned a People’s Daily commentary from earlier this month which suggested the Party had grown weary of what it calls “fan culture.” On Friday, multiple media outlets published accounts of what looks to be a sweeping effort by Beijing to erase some of the country’s celebrities from the internet.

This is the first (and, I imagine, the last) time I’ve quoted Variety, but this is technically entertainment news, so I feel obliged. The following excerpts are from “Celebrities Disappear From Internet as China Moves Against Fan Culture“, which was the most popular article on Variety‘s website Friday:

China announced further steps to control celebrity fan culture, which regulators say has become “chaotic.” The moves came as one of China’s most prominent stars Vicki Zhao Wei was scrubbed from the internet and another star, female actor Zheng Shuang was punished for a tax scandal.

The Cyberspace Administration of China on Friday issued a pair of connected notices. In one, it said that it would take punitive action against the spread of harmful information in celebrity fan groups. Discussion channels may be shut down.

Celebrities have been especially targeted by the crackdown. Superstar singer-actor Kris Wu has been arrested following rape allegations, and, as a consequence, his internet presence has been largely deleted.

Another star, Zhang Zhehan who is accused of hurting Chinese feelings after posing for photos at Tokyo’s notorious Yasukuni Shrine recently saw his films and TV series deleted by broadcasters and streaming platforms. The state-owned Global Times newspaper reported that Zhang has been “forced out of the entertainment industry.”

Now, Variety’s sister publication WWD reports that Zhao, a film and TV star who has appeared in “Shaolin Soccer” and “Red Cliff,” is also being banished. Her name is being edited out of the 1990s-made and still hugely popular TV series “My Fair Princess” by video platforms including Tencent Video, iQiyi and Youku.

What I’d say, in closing, is that market participants should be extremely wary of analysis that pretends as though one can somehow analyze Chinese tech in a vacuum, with no regard for the vagaries of the Party’s evolving social agenda.

I realize this is repetitive for regular readers, but I saw a hodgepodge of articles and blog posts this week suggesting there’s somehow a “floor” for China’s largest and most prominent companies. That’s probably true in the sense that, past a certain point, squeezing them too hard would affect the lives of everyday Chinese and thereby undermine social order. But that’s rarely the argument from folks inclined to “bargain” hunt in names like Alibaba.

This is a bit caustic, but it’s true: Beijing is perfectly willing to arrest, incarcerate and even execute people whom the Party believes are somehow not on board with its vision for the country. The idea that Xi is going to sit by while private tech firms accumulate, store and leverage the kind of big data his government is keen to collect and use for its own purposes (e.g., building what amounts to a police state) is wholly ridiculous.

When it comes to profitability and/or anyone’s valuation models, don’t forget that Chinese EdTech was a $100 billion industry a mere six months ago. Now, it’s banned from turning a profit.