By 
Chinese authorities seem tougher on their own digital giants than US authorities, despite the policy shift initiated by Donald Trump on the matter. Beijing gave yet another example of authoritarianism this weekend by forcing the removal of VTC service app Didi from app stores. The local cybersecurity authority blames the company for a serious violation of regulations on user data collection. Things can only go back to normal if Didi accedes to the official requests for changes. The Cyberspace Administration of China has also taken a swipe at Kanzhun and Full Truck Alliance, two other Chinese companies newly listed in New York.
The timing of the sanction does not seem to be coincidental. Didi Chuxing, often referred to as the "Chinese Uber", went public in New York last week, raising $4.4 billion (under the name Didi Global), the biggest deal since Alibaba. Its valuation reached 68 billion dollars. Even before the IPO, the company was already in the crosshairs of China, which had initiated an investigation based on a catch-all concept of threat to national data security. It is even rumored that Chinese officials did everything possible to avoid the company's listing on Nasdaq. Failing to get their way, it looks like they've orchestrated a violent backlash.
Didi was founded in 2012 by Cheng Wei, an ex-executive of the ubiquitous Alibaba, father of all China's digital giants. Its features are available in the former Middle Kingdom, where it is number one, but also in Russia or Australia. The application claims 493 million active users per year.
More than two-thirds of Chinese companies that have gone public this year in the United States are trading below their IPO price, according to data collected by Dealogic and published yesterday by the Financial Times. Since the beginning of the year, 34 Chinese companies have raised $12.4 billion in New York, which is obviously a record. However, the stock market debut is complicated, especially because of the tightening of regulations that regulators are imposing on the sector, in the United States but especially in China. Beijing is very interested in data collection, in particular in the technology, logistics and mobility sectors. Whoever controls data and cyberspace has a huge advantage on its rivals, even if recent research shows that the US is still far more advanced. But in this and other areas, China is learning fast.
IPOs in a variety of sectors (Source: MarketScreener with Bloomberg)
Reprogramming the stars of the sector:
The Communist Party is very critical of the emancipation caused by the development of Chinese digital technology. And the power acquired by some groups and their leaders. Recent targets included Alibaba and cryptocurrencies. But Beijing seems to have difficulty deciding between letting its leaders go out to conquer the world and punishing them for breaching Communist Party rules. It's an approach that seems a bit schizophrenic to Western observers, but it wasn't always the norm. Five or six years ago, China was still promoting its successful entrepreneurs. But since then, the central government has started to clean up its act, whether it be with regards to companies that were becoming too important in their original sector or in a number of sectors, such as Alibaba and Tencent, and/or their managers. It is rumored that China's most dynamic entrepreneurs are now racing not to reach the top of the list of China's richest people, so as not to attract too much attention from authorities.
Until early 2021, the prevailing euphoria had somewhat diluted the Chinese regulatory threat. Investors have to build in a risk premium when positioning themselves on these issues. Prosus is a good example of this new situation. The Dutch-listed group owns almost 29% of Tencent, which is basically a good idea. But the Chinese giant has become one of the victims of Beijing, which has made it clear that it should not venture beyond its current perimeter. Prosus' stock is suffering as a result, as it is closely correlated to Tencent's stock (up to more than 60%). More directly, American and international buyers of newly listed Chinese stocks on Wall Street are experiencing this bitterly.
Will Beijing crackdown continue? Probably. Should there be a permanent risk premium associated with it? Definitely. The Chinese regime is capable of hitting any company, at any time. When investors have a strong appetite for risk, it's easy to write it off. But if the focus is on quality, more selectivity is needed.
