Chinese regulators multi-task to plug loopholes in overseas listings as drop of doom hits wider

Asian stocks slumped across the board Wednesday (July 7), with Chinese technology stocks bearing the brunt of the decline. Investor pessimism about the prospects for economic recovery and the growth prospects of Chinese technology companies permeated the market.

The recent sustained rise in oil prices has led to worries about rising inflation. Investors are concerned that an overheated economy could force central banks to raise interest rates early, changing the current accommodative monetary environment that favors stock market growth.

On Wednesday, the Federal Reserve plans to release the minutes of last month’s Fed meeting, a document that will release more information to the outside world about the Fed’s views on the direction of monetary policy.

Another important reason for the decline in the stock market is the expansion of the crackdown on DDT by Chinese regulatory authorities. China’s State Administration of Market Supervision announced on Wednesday afternoon that it had issued penalty decisions in 22 cases involving a number of technology companies, including DDT, for violating the country’s anti-monopoly law in the online industry, handing out fines of 500,000 yuan in each case.

Of these 22 cases, Drip accounted for 8. Six cases involved Alibaba Group, five cases involved Tencent, two cases involved Suning and one case involved Meituan.

In April this year, the State Administration of Market Supervision punished nine similar cases, two of which involved Tencent, issuing fines of 1 million yuan.

The authorities said the companies involved were punished because they failed to apply for approval in advance to the relevant government departments in corporate mergers and acquisitions transactions, as required.

On July 2, China’s State Internet Information Office announced a cybersecurity review of DDT, ordering it to suspend new user registrations, and on July 4, the agency asked application stores to take down DDT’s apps for “illegal and unlawful collection and use of personal information. The agency also asked the application stores to remove DDT’s apps for “illegal and unlawful collection of personal information.

In the U.S., DDT’s stock fell about 20 percent on Tuesday. Before Wednesday, the company’s shares were still sliding.

Meanwhile, regulators are taking steps to close loopholes in the regulations that govern the overseas listings of many tech companies, including DDT, by moving to amend them.

Since 1994, Chinese companies have listed overseas (whether in Hong Kong or the U.S.) using a rule known as “Variable Interest Entities” to convert domestic entities into foreign-listed entities, thus bypassing regulatory approval. Many technology companies, such as Alibaba and Tencent, are using a rule called “Variable Interest Entities” to convert domestic entities into foreign-listed entities to bypass regulatory approval. Many technology companies, such as Alibaba and Tencent, have completed their overseas listings in this way.

DDT was interviewed by regulatory authorities three months before its IPO and was explicitly told that they were opposed to it doing so. But from what has been revealed so far, DDT ended up quietly completing its U.S. IPO while the Chinese Communist Party was celebrating its centennial, drawing the ire of regulatory authorities in an extremely rare case of authorities punishing a listed company one after another.

Perhaps it is because of the deterioration of U.S.-China relations and the increased uncertainty of the domestic business environment that many Chinese companies are more eager to go public outside of China. What has been seen is that Chinese companies are not slowing down their listings in the U.S. because of the increasing restrictions on Chinese companies.

So far this year, 37 Chinese companies have gone public in the U.S., surpassing last year’s figure, according to Bloomberg, the U.S. financial media. Chinese companies have raised a total of $12.9 billion in the U.S. stock market.

A number of other Chinese companies are quietly operating offshore listings, Bloomberg said, and it’s up to them to see if they can make it before Chinese regulators change the rules for offshore listings.