This article is part of Wellesley Hills Financial’s Market Movements series, found in our weekly newsletter.
China’s crackdown on big tech continued last week as Chinese regulators followed up on their announced investigation into ridesharing app Didi, demanding mobile operating systems remove the application from their marketplaces. China’s Didi investigation was announced just two days after the company finalized its IPO onto the New York Stock Exchange, generating $4.4 billion in funding from the international community. The timing of China’s announcement raises a slew of concerns: was Didi aware of China’s concerns before the IPO? Did the company’s Wall Street underwriters and investment bankers conduct appropriate diligence? Last but not least, why did Chinese authorities wait until after investors poured in billions of dollars to make these announcements?
Didi officially claimed to have no prior knowledge of China’s intention to put the company under review and ban new downloads. However, people familiar with the matter have since stated that China’s cybersecurity watchdog had ‘suggested’ Didi conduct a thorough self-examination of its network security in the weeks leading up the company’s U.S IPO. Adding to the suspicion of malfeasance, Didi’s roadshow – the process through which investment bankers solicit investor interest leading up to an IPO – was conducted in a matter of days, which is unusually brief for Chinese firms raising capital internationally.
China’s move to crack down on Didi was driven by data security concerns. Didi’s ridesharing app, which has hundreds of millions of users in China, sits on a trove of data, including maps and geographical locations, road conditions, and traffic choke points. While all of this data is contained on servers within China’s borders and is prohibited from export by law, Chinese authorities are concerned the company’s SEC disclosures of material contracts with vendors and suppliers could put the company’s data at risk if any of Didi’s server equipment was procured abroad. While these concerns are valid, there is speculation that China is making an example of Didi for listing in New York instead of Hong Kong and ignoring the ‘suggested’ network security review leading up to the IPO.
While international investors are starving for yield amidst historically low-interest rates and high equity prices, investment into Chinese Companies is increasingly becoming a risky proposition. Between U.S. Regulators being barred from reviewing audit papers for Chinese firms and the Chinese governments’ propensity to clamp down on its firms immediately before or immediately after an IPO, international investors need to be wary of chasing yield right off a cliff. It remains to be seen if this latest development will chill the pipeline of Chinese firms planning to IPO abroad or if investors are comfortable with the risk in the face of today’s low-yield environment.