Chinese online car giant Drip has been hit by a combination of Chinese regulators just two days after its low-key IPO in the United States. Some analysts believe that Beijing’s move is either an attempt to initiate a partial “financial decoupling” from the United States.
Chinese companies find it harder to list in the U.S. under heavy regulatory hammer
China’s cybersecurity office first imposed a cybersecurity review on DDT’s main application, DDT Travel, on July 2, suspending new user registrations. Then, on July 4, China’s State Internet Information Office (SIIO) took down Drip Travel, citing serious violations in the collection and use of personal information. Later, the Internet Information Office took down the entire line of 25 DDT apps. As of the close of trading on July 15, Drip’s share price was $12.36 per share, down from an offering price of $14 per share.
In addition to Drip, two other Chinese Internet companies whose apps were also investigated by China’s Office of Cybersecurity Review were also taken down: freight logistics company Man Gang Group and the “Boss Direct” online recruitment platform run by Watch.com. Both companies also went public in the U.S. in June.
Chinese healthcare data company LinkDoc Technology Ltd. has decided to shelve plans to go public in the U.S., Reuters reported, citing three unnamed people familiar with the matter, amid strong regulatory action by Beijing. This is the first known Chinese company to pull out of a U.S. listing after the DDT incident.
The current round of regulation comes as Beijing has also said it will tighten rules for Chinese companies to list overseas. According to the Wall Street Journal, the China Securities Regulatory Commission is drafting rules that would require companies to get regulatory approval before going public overseas. The State Internet Information Office will also lead a cross-departmental review of companies applying to list overseas to ensure that listing plans do not jeopardize China’s national security. In addition, the State Internet Information Office issued a notice on July 10 seeking comments on revisions to the Network Security Review Measures, which require Internet companies with more than 1 million users to want to file a network security review with the Network Security Review Office.
These new initiatives will greatly increase the difficulty for Chinese companies to go public overseas, especially in the United States. Previously, Chinese companies did not need to get approval from the State Internet Information Office to go public overseas. The Administrative License Law enacted in 2002 eliminated the pre-approval process for companies to list in the U.S. and provided a more relaxed policy environment for Chinese private companies to list in the U.S. as so-called “small red chips”.
Guo Yafu, head of New York-based Tianjiao Asset Management, believes that China’s increased regulation of technology companies and the higher threshold for listing in the U.S. are directly related to tensions between the U.S. and China.
“I think the problem with this thing is in the U.S.-China relationship,” he told Voice of America, “Why wasn’t the regulation so tight before? The main reason is that now, in terms of the general environment, the relationship between China and the United States is not good. If China-US relations were good, none of this would be a problem.”
The U.S. wants big data on drops?
In December 2020, the U.S. House and Senate voted unanimously to pass The Holding Foreign Companies Accountable Act for Chinese stocks, and it has been signed into law by then-President Trump. The Act requires foreign companies listed in the United States to comply with U.S. accounting oversight rules. If the U.S. regulator, the Public Company Accounting Oversight Board (PCAOB), fails to review a foreign company’s foreign public accounting firm for three consecutive years, the company will face delisting.
The regulatory standoff between the U.S. and China has been exacerbated by the implementation of the Foreign Company Accountability Act. Beijing and Washington have been at odds for years over whether they can disclose audit transcripts of Chinese stocks. The Chinese side argues that audit transcripts may contain sensitive information that could jeopardize China’s national security if disclosed to U.S. government agencies.
The cover of Caixin Weekly’s July 12 issue 27 reported that one of the main reasons for the overall tightening of China’s cybersecurity review is concern about “the potential for data leakage due to the long arm of the U.S.”. The report quoted a senior investment banker as saying that Drip may be forced to provide data to the PCAOB because of financial interests.
Statistics show that Drip has 377 million active users and 13 million active drivers in China, and 493 million active users and 15 million active drivers worldwide. In addition, Drip obtained the qualification of Class A mapping for the production of navigation electronic maps in 2017, and has a large amount of accurate geographic data including vehicle positioning and the surrounding environment. There are even claims that Drip’s big data can be used to locate who works in which government department.
An opinion piece published in the Chinese official media Global Times on July 10 said, “The U.S. continues to escalate its strategic crackdown on China, and China’s national security situation faces some unprecedented challenges …… cannot lead to national security because some companies’ equity is held by foreign capital and go public outside the country, etc. security vulnerabilities.”
But Jesse Fried, a Harvard law professor, said that from the Chinese government’s perspective, the fear of sensitive data leakage has some legitimacy, but the reality is that neither the PCAOB nor any U.S. government agency would seek to get such sensitive data, and the fear of data leakage is nonsense.
The PCAOB, which examines audits every three years, doesn’t ask for that kind of information,” he told Voice of America. U.S. regulators don’t ask for that kind of information. It’s not relevant for any regulatory purposes that I’m aware of.”
The drops have come out to deny the claim that the data needs to be given to the U.S. An executive said on Sina Weibo that all of Drip’s Chinese data is stored on servers in China.
Beijing wants to decouple from U.S. finance?
The New York Times reports that this is a strong signal from Beijing that it “does not encourage Chinese technology companies to list in the United States, especially as the two countries battle for tech hegemony.” Some analysts have also suggested that the crackdown on DDT may be part of Beijing’s proactive strategy to promote financial decoupling from the United States.
Political commentator and researcher at the China Strategic Analysis think tank I.W. Deng argues that Beijing’s move is a risky choice to proactively decouple itself from U.S. capital markets in high-tech companies and those with basic data at stake. In an op-ed published in Deutsche Welle’s Chinese website, he writes, “The Chinese government is not just punishing DDT and other disobedient companies, but is also cutting off Chinese tech companies from Wall Street and partially decoupling them from the U.S. capital markets in this way. It is also, in terms of that purpose, an act of active choice.”
Fried, a Harvard law professor, believes that decoupling from U.S. finance may be Beijing’s long-term goal, but in the short term China’s capital markets are not equipped to give high-tech companies like DDT the ability to IPO.
I think the Chinese government realizes they can’t do that [financial decoupling] right now because China’s capital markets aren’t really set up to handle IPOs of relatively new and hard-to-value companies, which is something the U.S. market is good at, and the Chinese market isn’t capable of doing that right now,” he said. So my best guess is that the Chinese government is not trying to prevent Chinese companies from going public in the U.S. in the near future. I think they have specific concerns about certain types of companies, but in the long run, they may prevent Chinese companies from listing here [in the U.S.] once the capital market conditions in China are good enough for an IPO in China.”
Can Hong Kong reap the benefits?
Prior to the DDT debacle, Chinese companies made a big push into the U.S. capital markets despite challenges such as U.S.-China tensions and regulatory policy uncertainty. A total of 36 Chinese companies have listed in the U.S. so far this year, already reaching the level of the entire year of 2020, according to Dealogic.
Guo Yafu, head of New York-based Tianjiao Asset Management, said the U.S. capital market has advantages unmatched by any capital market in the world.
First of all, it is a large and liquid market,” he said. Second, the U.S. capital market is also the most mature market in the world. Not only Hong Kong, but also Tokyo and London are not comparable to the United States. In addition, there is a special advantage of listing in the U.S., that is, after the reform and opening up, many Chinese students who came to the U.S. from mainland China have taken root in the U.S., and some of them are engaged in the financial industry. They have created very good software support for Chinese companies coming to the U.S. to go public.”
So far in 2021, Chinese companies have raised a total of $12.5 billion in U.S. IPO offerings, well above year-ago levels, according to global financial markets data provider Lufthansa (Refinitiv).
However, Beijing’s strong hand in restraining technology companies will undoubtedly dampen confidence in Chinese companies going public in the U.S., and those still seeking to list overseas may retreat to Hong Kong for a listing. Shares of the Hong Kong Stock Exchange rose as much as 6.2 percent on Wednesday, showing optimism.
But Gary Clyde Hufbauer, a senior fellow at the Peterson Institute for International Economics, told the Voice of America that Beijing’s crackdown on Hong Kong, especially after the passage of a national security law, has made Hong Kong’s status as an international financial center is not what it used to be.
The result of what the Chinese government is doing to Hong Kong is certainly weakening Hong Kong’s position as a financial center,” he said. It [the financial center] is moving to Shanghai or Singapore, and that’s the effect of this crackdown by China. It won’t have an effect overnight, but I think in 10 years, Hong Kong will be a much smaller financial center than Shanghai or Singapore.”
President Biden told reporters Thursday that his administration will warn U.S. businesses on Friday that the risks of operating in Hong Kong are rising as China tightens its grip on the city as a financial center. The Financial Times report, citing three people familiar with the situation, disclosed that the State Department would raise concerns about a range of threats, including China’s ability to gain access to data stored by foreign companies in Hong Kong.
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