If there’s one thing that Washington and Beijing agree on, it’s that neither wants Chinese companies to list in America.
On Friday, ride-hailing giant Didi finally announced that it would delist in the U.S. in favor of Hong Kong, after long, embattled months of conflict with the Chinese government. A day earlier, the SEC finalized a legal framework that can strike Chinese companies from the U.S. public market for failing to turn over audit papers.
And remember, at the beginning of the year, when U.S.-China relations were tense but Chinese listings were at an all-time high? That’s because those were all “variable interest entities” (VIEs) — a status that allowed them to go public overseas without much scrutiny in their home countries. Didi was one of them. But as far as I can see, that loophole will be closing: the Chinese government is moving to create a restricted list of industries that can use the tactic. The restrictions will almost certainly target technology.
That’s a lot to interpret. As a Chinese person might say, Didi turned its particular problem into a political one by defying clear orders from the government. The company went a step further than just using the VIE loophole: it was apparently told not to list, but did. When you’re asked to do something, especially on national security grounds, you don’t decide for yourself that it’s actually no big deal. Friday’s announcement was a wake-up call for any other Chinese company entertaining similar ideas.
So, the next question is: what of an existing listed company, like Alibaba? It’s also a VIE, and has earned the anger of Beijing. Will it be forced off the register, too? To me, Didi’s plight has now made that a possibility, which it certainly wasn’t before.
Could it get ahead of the regulators by taking itself off, as some are asking? No. With Chinese regulations still coming in hot and heavy, you don’t do anything unless explicitly told to.
Alibaba also stores massive amounts of data, which was part of the perceived risk of Didi going public in the U.S. How does that play? Well, one could argue that aggregators are keeping track of a lot less information than operators like Didi, which may be recording their users’ entire ride. Alibaba’s data is more varied — although it does also have a mapping company and a ride-hailing aggregator, so there is definitely some overlap.
And finally, surely Jack Ma’s speech at the Bund last year, which took aim at regulators and was imagined to have kicked off months of crackdown on Ant, was similarly audacious? Compared to Didi consciously flouting Beijing’s orders, no.
Didi, in some ways, invited this outcome. Its decision to exit from the New York Stock Exchange is a dramatic climbdown that must have been negotiated, fought over, every hour and every day of its investigation by the Chinese government. The longer the probe dragged on, though — five months in total — the more it seemed unlikely that Didi would get away with a slap on the wrist. Still, it’s a shocking resolution, even for those who weren’t expecting anything mild.
For budding Chinese tech players, until VIE listing requirements are made much clearer, it now makes no sense to even consider looking at U.S. capital markets (although, per the China Securities Regulatory Commission, some braver ones are still trying). Better to go to Hong Kong, as ByteDance is also reportedly doing.
At the end of the day, I don’t think we can get away from the deep-running effects of deteriorating relations between the U.S. and China, and the high level of mutual distrust. With America empowering itself to have foreign companies turn over financial data, why should China not expect the worst of SEC investigations — which we know can include subpoenas even for personal communications that easily run into the millions of pages, and have a very broad remit? I mean, isn’t everyone a bit paranoid these days?
There’s good news: With the Didi decision out, China’s updated, clearer VIE rules should be around the corner. And the bad news: Even that may not soothe investors’ concerns about other listings, notably Alibaba. Trust is at an all-time low. Now that the delisting gates have been breached, I’m not sure the fear will dissipate, no matter how many assurances are given. I wouldn’t blame investors for steering clear of Chinese-U.S. tech listings for a while.