For global investors, the Didi Global Inc. saga has turned China’s largest tech company into a riskier bet as President Xi Jinping seeks control of one of the country’s most valuable resources: big data.
In most cases, Didi is an appealing success story. The company controls almost the entire ride-hailing market in China and includes SoftBank Group Corp. and Tencent Holdings Ltd. to the main shareholders. Didi was even profitable in the first quarter, a rarity for the industry. Last week’s initial public offering was the second largest in the US by a China-based company and was well received. Didi sold 317 million shares – around 10% more than originally planned.
Yet its listing on the eve of the centenary of the Communist Party in Beijing did not seem to spark any celebration. Instead, China’s cyberspace regulation announced two days after going public that it was reviewing the company for national security reasons. Two days later, the supervisory authority announced that the company had committed serious violations in the collection and use of personal data. It then ordered the company’s app to be removed from the stores.
The stock fell 28% in pre-trading hours on Tuesday as US markets reopened.
What made Didi so valuable to investors is what makes it and other tech companies a potential threat to Beijing: it contains huge amounts of sensitive data from half a billion active users per year, mostly in China. Over the past year, Xi’s government has tried to take control of this data to protect users from abuse and find a way to use it to fuel broad economic growth rather than simply enriching a cohort of billionaires, which could possibly challenge the communist authority of the party.
The Cyberspace Administration of China suggested Didi postpone his IPO weeks before debut to review his network security, the Wall Street Journal reported, citing people with knowledge of the matter. The watchdog was particularly concerned that listing in the US would force Didi to disclose its key vendors and suppliers, which could leave it vulnerable to security breaches, he said, citing unidentified individuals.
Didi said in a statement emailed Monday that she was unaware of the Chinese watchdog’s decision to suspend user registrations and remove Didi Chuxing from app stores prior to its listing.
Didi, like many other Chinese tech giants, grew rapidly without full oversight. Beijing is now trying to close regulatory loopholes, but it will take more time. By listing in the US, Didi effectively bypassed an extensive approval process by China’s securities regulator at a time when officials were pushing for more companies to raise funds domestically.
“Beijing isn’t pleased to see its national champions befriending overseas stakeholders,” said Xiaomeng Lu, senior analyst at Eurasia Group, a political risk consultancy. “She also wants tech companies to keep their core resources – data and algorithms – in China.”
Some projections show that China will have a third of the world’s data by 2025, potentially giving it a massive competitive advantage in areas like artificial intelligence that will power the modern economy. There is also a lot at stake geopolitically: The Biden administration is looking into which user data should be off-limits for China, and Beijing is similarly concerned about the disclosure of information that could be used by its opponents.
China’s campaign to put tighter controls on the country’s tech companies accelerated late last year as the country recovered from the effects of the Covid-19 pandemic and tensions with the United States intensified. Officials started a mighty broadside on the fintech sector when they pulled the $ 35 billion double listing of Ant Group Co. in Shanghai and Hong Kong at around the eleventh hour.
Like Didi, Ant dominated his field. In just a decade, the company, a subsidiary of Jack Ma’s Alibaba Group, had reshaped the lives of millions of Chinese through its Alipay app and the giant Yu’ebao money market fund.
In March it was clear that the authorities were expanding the offensive. President Xi warned at a meeting of the Communist Party’s Supreme Financial Advisory Committee that Beijing would pursue so-called “platform” companies that have amassed data and market power. This term effectively encompasses a range of companies providing services to hundreds of millions, from Didi to the grocery supplier Meituan to leading e-commerce companies like JD.com Inc.
The crackdown has put a heavy strain on the technology sector. Alibaba’s Hong Kong-traded shares are down 33% from their October high, while Tencent (China’s leader in social media, games and music publishing) has fallen 28% from a record in January. Didi fell up to 11% on Friday.
China isn’t the only one trying to control the dominance of big tech companies. The US Congress tries to force companies like Amazon.com Inc. and Apple Inc. to radically change their business models while Google faces a full investigation of its advertising technology by the European Union.
“We have entered a new phase around the world where regulatory scrutiny of the technology has increased and will continue for some time,” said Joshua Crabb, senior portfolio manager at Robeco in Hong Kong.
But the scale and speed of Xi’s campaign speak to the Communist Party’s obsession with control. The party is fighting multiple national security threats, and its October five-year plan included a focus on security issues for the first time. A rivalry with the US only intensifies under the Biden administration, which recently rallied allies to present a more united front against Beijing.
The problem is, Chinese entrepreneurs often turn to U.S. exchanges that offer founders something they can’t get at home. A large pool of international capital and lower barriers to entry mean the world’s largest market remains a major target for Chinese and Hong Kong companies that raised fundraising at a record pace earlier in the year. Potential forced delistings by the New York Stock Exchange and stricter requirements on the Nasdaq have not deterred Chinese companies that rely on cash.
Although the Communist Party has little leverage over the US listing process for its private companies, it can often kick-start top management. But exerting influence over a company’s operations – as was the case with Didi – is a far bolder move and shapes the US stock market.
China’s cyberspace regulator “is trying to intervene to influence this entire process,” said Chucheng Feng, co-founder and partner of Plenum, a research firm specializing in China’s politics and economics. “You’re trying to use Didi to create this example of how a business will be listed in New York in the future.”