China’s biggest technology companies – including Drip, Alibaba and Tencent – are suddenly under intense scrutiny as authorities vow to crack down on Chinese companies listed on U.S. exchanges. The move could upend a $2 trillion market beloved by some of the biggest U.S. investors. And the plunge in Drip’s share price may have cost some U.S. investors dearly.
Kyle Bass, a hedge fund manager and outspoken critic of Beijing, said the timing of China’s crackdown on the ride-hailing app Drip is no coincidence.
Bass told CNN Business on Wednesday, “The Chinese are convinced that symbolism and numerology …… banning an initial public offering that just went public in the U.S. on our Independence Day — with U.S. investors’ money — is basically a big deal for the United States.”
Beijing is tightening regulations on a large number of Chinese companies, the vast majority of which are technology companies, that are listed in the United States. China’s State Council said in a statement Tuesday that it will update its rules on the “offshore listing regime for domestic enterprises” and will tighten restrictions on cross-border data flows and security.
Drip’s shares plunged 20 percent Tuesday after Chinese regulators announced on July 4 that they were banning the platform from selling on the country’s app store, amid allegations of cybersecurity risks and violations of privacy laws.
Drip, one of the world’s largest online car companies, went public on the New York Stock Exchange on June 30, raising $4.4 billion. This was the largest IPO of a Chinese company in the U.S. since 2014, just two days after China launched a further escalating investigation into Drip over the weekend.
They knew it would be public,” Bass, founder and chief investment officer of Hayman Capital, told CNN. They knew they were going to ban it in the app store and shut it down.”
Bass believes the moves are linked to top Communist Party leaders. He said, “None of this would have happened without (Chinese President) Xi Jinping’s imperial sword to make him claim it.”
The CNN report questioned why China’s crackdown was not announced until after DDT went public, a move that has cost some U.S. investors dearly. The company’s market value fell to $57 billion on Wednesday, down from nearly $70 billion on the day of its IPO.
Bass, who successfully bet on the collapse of the U.S. housing market before the Great Recession in 2008, has become an outspoken opponent of China’s Communist Party. In the CNN interview, he called on U.S. financial regulators to do more to protect U.S. investors.
Specifically, Bass urged the U.S. Securities and Exchange Commission to allow investors who bought drops of stock to rescind their trades and recoup their money.
“Give the investors their money back,” Bass said. “It was clearly sold under false pretences and is therefore fraudulent.”
Bass more broadly criticized the SEC for allowing Chinese companies to list on U.S. exchanges even though they are not required to comply with U.S. auditing standards.
The CNBC report cites market analysts who argue that Beijing’s crackdown on technology companies is not a new move. Since Chinese authorities have the ability to act quickly, and any action could wreak havoc on key areas of Wall Street. Market analysts believe this would not only threaten IPOs in the pipeline, but also put pressure on the popular Chinese market for American Depositary Receipts (ADRs).
According to the U.S.-China Economic and Security Review Commission, there are at least 248 Chinese companies listed on the three major U.S. exchanges with a combined market capitalization of $2.1 trillion. There are eight national-level Chinese state-owned companies listed in the United States.
These include shares of U.S.-listed companies headquartered in mainland China, some of which include ADRs, whose value has fallen by a third from its peak in February due to increased regulatory pressure, according to a CNBC report citing analysis by the Kingmaker Golden Dragon China ETF (PGJ), which tracks U.S.-listed Chinese stocks. ADRs are effectively a way for U.S. investors to buy shares in foreign companies.
Investors will have to weigh the risks of holding ADRs as tensions between Beijing and Washington continue to rise, and all global investors will have to weigh the risks of China’s huge potential market,” Peter Berezin, chief global strategist at BCA Research, said in a report on Wednesday. attractiveness and the possibility that officials could change the company’s outlook in one fell swoop.”
The ride-hailing app Drip has become the latest victim of a crackdown by Chinese authorities. The stock plunged nearly 20 percent on Tuesday after Beijing announced a cybersecurity investigation and suspended new user registrations.
Republican Senator Marco Rubio told the Financial Times in a statement Wednesday that it was “reckless and irresponsible” to allow the “irresponsible Chinese company” Drip to sell its shares on the New York Stock Exchange.
The CNBC report also mentions that Nasdaq-listed Weibo, whose operator Tencent has reportedly undergone regulatory investigations, particularly in its financial technology business, is now planning to go private. The report also mentions that Beijing has been seeking to curb Chinese billionaire Jack Ma’s Alibaba by launching a series of investigations since last year.
Dewardric McNeal, managing director and senior policy analyst at Longview Global, was quoted in the CNBC report as saying, “You have to be able to understand the political and national implications of investments, transactions, dealings with Chinese companies, investments with Chinese companies and interest in doing cross-border business. the political and national security dynamics involved in interest in doing cross-border business.”
Citing people familiar with the matter, Bloomberg News reported that Chinese regulators are eyeing a rule change that would allow them to block a domestic company from listing in the U.S. even if the unit selling the stock is registered outside of China.
Market analysts say the move could be a huge blow to Chinese companies that have scrambled to list in New York in recent years. In 2020, 30 Chinese IPOs in the U.S. raised the most money since 2014, according to data from Renaissance Capital.
Donald Straszheim, senior managing director of China research at Evercore ISI Group, was quoted by CNBC as saying that fewer and slower new Chinese IPOs in the U.S. are likely due to the government crackdown.
Beijing is not trying to stop all companies from listing in the U.S.,” Straszheim wrote in a report. However, the business relationship between the U.S. and China is better than nothing.”
As of the end of April, about 60 Chinese companies were still planning to list in the U.S. this year, according to the New York Stock Exchange.