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President Xi Jinping is finally addressing what his administration has long viewed as a nagging national security risk and flagrant weakness in China’s financial markets – their failure to attract the country’s top tech companies, which have instead gone to New York to raise capital.
This constant flow of business and prestige for the American stock exchanges is now over. After spending most of his second term focusing on perceived national security risks in Xinjiang, Hong Kong, and China’s domestic financial sector, Xi turns his attention to the country’s New York-listed tech champions and the data that drives their activities.
The apparent trigger for this new campaign was Didi Chuxing’s decision to go ahead with an initial public offering of US $ 4.4 billion on the eve of the celebrations marking the centenary of the founding of the Chinese Communist Party. The ridesharing company did so despite fears at home that U.S. regulators could gain access to its treasures of customer data.
In response, the Cyberspace Administration of China, the country’s internet regulator, on July 2 ordered Didi to stop recruiting new users pending a review of its data security practices. When trading in the United States of the company’s newly listed shares resumed on Tuesday, they fell 20%.
Lest anyone miss the message, on Tuesday night, the Chinese government’s State Council and the Party’s Central Committee issued rare joint guidelines that will lead to much more scrutiny of overseas IPOs. As a result, said Chen Long of Plenum, a Beijing-based consultancy firm, the ACC “could become de facto the highest authority to approve [tech] IPO ”.
While detailed procedures and requirements have yet to be defined, it is clear that the earlier freedom of Chinese tech champions to list overseas stocks when and where they deemed it appropriate has been revoked. The new policy is also in line with “Beijing’s growing emphasis on self-reliance and more introverted policies,” said Eswar Prasad, a Chinese financial expert at Cornell University.
One of Didi’s early investors, who was fortunate enough to sell his shares before the investigation was announced, noted that the regulations were intentionally vague. “China can justify anything in the name of national security, just like the United States,” the investor said. “Xi made it clear that he doesn’t want the biggest Chinese companies to IPO in the United States.
The irony is that many of Washington’s top Chinese hawks, like Florida Senator Marco Rubio, also don’t want the biggest Chinese companies to IPO in the United States.
Besides Didi, who has more than 490 million users, Chinese tech champions listed in the United States include Sina Weibo, which operates the Chinese equivalent of Twitter, and e-commerce giant Alibaba. The latter was a New York-only listed company for five years before completing a secondary listing in Hong Kong in 2019. Imagine the reaction of the Chinese hawks in Washington if Twitter and Amazon were only listed in Shanghai.
China’s main critics in Washington shouldn’t want what Xi wants, and vice versa. If Xi is right that Alibaba, Weibo, and Didi’s New York listings are bad for China, then they’re probably good for the United States. But on Tuesday, Rubio told the Financial Times that allowing Didi to register in New York had been “reckless and irresponsible.”
Rubio and many others on Capitol Hill object that Chinese companies have so far been able to evade US audits because Beijing does not allow them to open their books to foreign accountants.
Xi’s administration fears this will change. Legislation signed by Donald Trump in his last year in office can force the delisting of any company that does not accept audits from the Washington-based Public Company Accounting Oversight Board for three years.
Xi and Rubio probably both agree that three years is too long. Thanks to Didi’s debacle, they can both get what they want much sooner than that.
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