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DECOUPLING

Didi’s abrupt US delisting shows the extremes of Beijing’s data security crackdown

A trader works during the IPO for Chinese ride-hailing company Didi Global Inc on the New York Stock Exchange (NYSE) floor in New York City, U.S., June 30, 2021.
REUTERS/Brendan McDermid
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Beijing’s new focus on data security is forcing Chinese ride-hailing giant Didi Chuxing to depart the New York Stock Exchange less than six months after its more than $4 billion listing.

The company announced the decision yesterday (Dec. 2), and said it will ensure its American depositary shares can be converted into “freely tradable shares” on another international stock exchange. It also said it has started pursuing a listing on the Hong Kong Stock Exchange. The firm didn’t give a reason for the delisting, or a time frame for the Hong Kong listing.

Didi reportedly drew the ire of Beijing for pushing ahead with its US plans before fully addressing regulatory concerns about its data flowing overseas as a result of the listing. Soon after the listing, Chinese authorities opened a cybersecurity review into the company and it has remained under unprecedented scrutiny ever since.

Didi’s IPO came as China has been building a legal architecture to secure data generated by the country, as well as to deploy it as an economic good. The delisting of the company, which raised around $4.4 billion in its IPO in June, shows just how far China is willing to go to ensure the security of its data, be it private or public. The country increasingly sees data as a national asset, and is rolling out data regulations specific to different industries.

“A delisting is the only choice Didi has now, otherwise it may face even harsher scrutiny. Investors of the company can continue holding its shares after the delisting, and resume trading when the company lists in Hong Kong,” said Shen Meng, director of Beijing-based boutique investment bank Chanson and Co.

For investors, Hong Kong is still likely seen as a more acceptable market given the similarities its trading regulatory system has with the US, he said.

Mainland China’s stock markets, meanwhile, are relatively younger and less connected to global institutional investors, and plans to relist there could have caused more worry among existing investors.

Chinese stocks and US markets head for divorce

The fate of Didi could also be a prelude to the end of the era of US-listed Chinese companies.

In the past, listing in the US was seen as a hallmark of success, and some of China’s most prominent corporate crown jewels are listed in the US, most notably Alibaba, whose blockbuster 2014 IPO set a record.

But with both Chinese and US regulators enhancing scrutiny of US-listed Chinese firms, many have been flocking to Hong Kong, which is part of China but retains an independent financial system. Alibaba, for example, carried out a secondary listing in Hong Kong in 2019.

The US Securities and Exchange Commission has been calling on Chinese firms listed in the US to be more transparent with their books. Yesterday, the SEC said that Chinese companies need to reveal whether they are owned or controlled by a Chinese government entity, which could hasten the “decoupling” of Chinese stocks and the US markets. China has not given the SEC access to local audits of firms listed in the US due to national security concerns, which has long been seen as a major risk to US investor interests.

Meanwhile, China in July proposed rules that would require most tech companies that gather user data to go through security checks before listing overseas. It also seems more and more likely that Beijing will end the “variable interest entity” loophole used by many Chinese firms to create overseas-based firms that issue American depositary receipts (pdf) in order to list in the US

“There could be a wave of delisting of US-listed Chinese companies going forward, no matter whether the firms have massive amounts of user data or not. After all, the authority for deciding is held by the Chinese government,” said Shen.

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