2021.09 The Taiwan Banker NO.141 / By Matthew Fulco
Ill-fated Didi IPO signifies new stage in US-China financial decouplingBanker's Digest
Beijing’s harsh reaction to Didi Chuxing’s listing on the New York Stock Exchange could divert a large number of future Chinese IPOs from the US to Hong KongPrior to Didi Chuxing’s ill-fated IPO on June 30, U.S.-China financial-decoupling had largely been a one-way street. It was Washington – and specifically Congress – that had led the charge to force Chinese companies to either allow comprehensive audits by U.S. inspectors or face forced delisting from U.S. exchanges. Legislation passed in 2020 gives Chinese companies three years to comply. Some in Washington have been keen to use the threat of forced delisting as leverage in the U.S.’s broader cold war with China, while others genuinely want to protect American investors from risk they do not understand well. After all, fraudulent accounting is prevalent enough among Chinese firms that short sellers like Muddy Waters have made a business out of exposing it. Suppose, however, that China’s ruling Communist Party wants to exert tighter control over Chinese companies listing in the United States. As relations with the U.S. deteriorate, Beijing is increasingly concerned about its vulnerability to U.S. sanctions in the financial sector. At the same time, under the dictatorial Xi Jinping, the CCP is eager to rein in tech giants that have gotten big enough to fail – because they are challenging the party’s preeminence. What began with Ant Group’s abortive IPO last fall has snowballed into a far-reaching campaign by the party-state to bring China’s most powerful private companies to heel. The Didi debacle Despite the ominous environment for Big Tech in China, Didi went ahead with its listing on the NYSE against the wishes of Chinese regulators. The US$4.4 billion IPO, initially hailed a triumph, turned out to be a Pyrrhic victory. Just several days after Didi’s listing, the Cyberspace Administration of China (CAC) moved to discipline the company. The CAC announced a cybersecurity review that it attributed to Didi’s data practices and then banned Didi’s app from China’s app stores. Didi’s shares quickly plummeted below the offering price. Didi’s biggest error was not its decision to go public – Beijing generally supported that idea – but listing too far from home while failing to heed regulators’ warnings. According to Bloomberg, Chinese regulators expressed concern as early as April about Didi’s data security practices, which reportedly included disclosing statistics on government officials’ taxi trips. Regulators believed Didi could have listed instead in Hong Kong or even mainland China, where they believed that disclosure risks were lower than in the U.S. In fact, Didi did consider listing in Hong Kong. However, the Hong Kong Stock Exchange has tougher listing requirements than the NYSE and the company felt it could get a higher valuation in New York. That may well have been true, but Didi failed to accurately assess the political climate. Now it is going to pay a price many times greater than the difference between its valuation in New York and Hong Kong. The company may literally have to pay a massive fine, perhaps exceeding the record US$2.8 billion Alibaba had to fork over earlier this year. That would be getting off lightly though. More likely, Didi will be further penalized. It might have to surrender control of its most valuable data to a state-owned third party; Beijing might bring in a state-owned investor to take a majority stake in the company, or in a worst-case scenario, Didi could be forced to delist from the NYSE. Frozen deal pipeline The immediate effect of the troubled Didi IPO, besides tanking the company’s shares and leaving investors high and dry, has been to freeze the previously red-hot deal pipeline for Chinese firms listing in the U.S. Indeed, Dealogic data show that 34 Chinese companies raised more than US$12.4 billion in New York in the first half of 2021, a half-year record. More are waiting in the wings. Before the doomed Didi deal, about 20 Chinese companies had publicly disclosed plans to raise US$1.4 billion from share sales in New York this year, according to Dealogic. Now they are likely to lay low, as they face strong regulatory headwinds in both China and the U.S. In late July, Alison Lee, a top official at the Securities and Exchange Commission (SEC), told Reuters, "Public companies must disclose significant risks which, for China-based issuers, may sometimes involve risks related to the regulatory environment and potential actions by the Chinese government.” Senator Bill Hagerty, a member of the Senate Banking Committee, was more candid in the statement he sent to Reuters. "U.S. regulators must ensure that American investors and workers are protected from the sort of non-market behavior that is leaving American investors scorched, he said. Didi – as well as its IPO underwriters and board – also must contend with a number of securities class-action lawsuits filed by U.S. law firms on behalf of Didi shareholders who lost money. Many of the suits allege that false and misleading statements were made ahead of the firm’s IPO, which was led by units of Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co. Thus far, Beijing has not commented publicly on whether it plans to curtail or even suspend IPOs by Chinese companies in the U.S. Fang Xinghai, vice chairman of the China Securities Regulatory Commission (CSRC), reportedly told major investment banks in late July that China will continue to allow Chinese companies to go public in the U.S. as long as they meet listing requirements. It is unclear what exactly meeting listing requirements will entail. Fang said that the process of Chinese companies listing in the U.S. “would have to be adjusted if there were national security concerns,” according to CNBC. Given the wide scope of what may define “national security concerns” for the Chinese Communist Party, such a statement is far from reassuring. Head for Hong Kong There remain compelling reasons for certain Chinese companies to go public in the U.S. rather than Hong Kong. The U.S. boasts the world’s most liquid capital markets and generally has an easier listing process than Hong Kong. Bankers also receive fees of 5% to 7% on funds raised through U.S. share sales, compared with about 2% in Hong Kong, according to The Financial Times. At the same time, some investors prefer to exit in the U.S. This was the case with Ping An Insurance-backed Lufax, the online wealth management platform that listed on the Nasdaq in October 2020. Both individual investors from Ping An and Lufax’s many foreign institutional investors sought to cash out in U.S. dollars in the U.S. Nevertheless, the geopolitical winds are blowing east for Chinese firms, not west. Keep in mind that Hong Kong is fighting to retain its crown as an international financial center following the imposition of a draconian national security law. The U.S. has already sanctioned the city’s chief executive Carrie Lam and is likely to step up pressure on the erstwhile British colony in the future. In this geopolitical environment, any major Chinese tech company that chooses New York over Hong Kong for its IPO has to consider the signal that sends to Beijing. Chinese tech companies, with their troves of user data that could raise national security concerns in Beijing, will be wary about risking a high-profile meltdown in the vein of Didi. Choosing Hong Kong will still check the box for an “offshore” listing, while not risking regulatory ire in Beijing. Thus, it is no surprise that ByteDance, the owner of the popular short-video app TikTok and one of the world’s most valuable startups, is targeting a Hong Kong IPO in early 2022. The Beijing-based firm had previously considered going public in New York, but nixed that plan after conferring with Chinese cybersecurity regulators.