Beijing Didi explosion shakes $ 2 billion in U.S. stocks

HONG KONG – Three years of efforts by two US presidents to crack down on China’s access to the world’s largest capital market are coming out of the game from unexpected sources: Beijing.

Warnings from the highest echelons of the Chinese government about tighter oversight of data security and overseas quotes, as well as slowing growth amid heightened regulation, have dramatically raised the stakes for companies. Continental stocks whose shares are traded in the United States – triggering a strong investor liquidation and threatening future deals.

Chinese stocks listed in the United States, as measured by the Nasdaq Golden Dragon China Index, have been trading at their deepest discount to general US stocks since at least September 2016, exceeding levels seen even at the height of the market. trade war under former President Donald Trump.

The index, which tracks 98 Chinese companies listed in the United States, has fallen 10.5% since July 2, when the Cyberspace Administration of China berated Didi Global for undermining national security with its handling of data. It came just two days after shares of Didi, China’s largest rideshare company, began trading in New York after a $ 4.4 billion IPO.

The spread between the two benchmarks has also grown at the fastest rate in at least five years, indicating how quickly sentiment has changed and how far the markets have been taken aback.

Beijing has so far been unclear on some of the details of its crackdown, but on Saturday it said companies with data on more than one million users must now apply for cybersecurity approval when researching overseas listings – a decision that would encompass almost all applicants for an offshore IPO.

Analysts are detecting motivation to reduce exposure to the United States and its regulators in an effort to protect data and reduce the dependence of mainland companies on the world’s largest capital market for funding. As of May 5, 248 Chinese companies were listed on the US stock exchanges, with a total market capitalization of $ 2.1 trillion, according to the US-China Economic and Security Review Commission.

“China has long wanted self-sufficiency in a multitude of industries and it would be reasonable to assume that capital markets are part of the process,” said market analyst Fraser Howie, co-author of the book “Red Capitalism : The Fragile Financial Foundation of The Extraordinary Rise of China “.

“China will prefer companies to be listed on land or at least in Hong Kong, because they would like to be the regulator of their own companies. When it comes to companies already listed, the story of growth is behind them and investors. are already reassessing stocks. “

Some of the financial consequences of Beijing’s restrictions on its own ‘big tech’ sector – which first increased in November when Chinese regulators forced financial services provider Ant Group to suspend what was shaping up to be the largest initial public offering in the world – were dramatic.

Alibaba Group Holding, founded by Jack Ma, which owns a third of Ant, has lost $ 300 billion, or one-third of its market value since then. Other major Chinese companies Tencent Holdings and online retailer have sold a total of $ 310 billion since their stock peaked in February.

And Didi collapsed in market value of $ 11 billion from a closing high on July 1 following the cyberspace regulator’s offensive.

The focus is also on companies that can now rethink a listing in the United States. Chinese medical data group LinkDoc Technology called off its U.S. IPO at the last minute on Thursday, two people familiar with the deal said. He was to raise up to $ 210 million.

The trade war the then US president started in 2018 forced China to pave the way for self-sufficiency in key industries, including tech and semiconductors last year. Towards the end of his term, Trump announced investment bans on a range of Chinese companies and approved rules to deregister mainland companies.

Under a law passed last year, Chinese companies risk being banned from U.S. stock exchanges by 2023 if U.S. regulators are not allowed to review their audit records. Beijing bans such exams for national security reasons.

Current US President Joe Biden has largely kept the pressure on Beijing. Last month, to sharpen action started under Trump, he signed an executive order banning U.S. residents and entities from investing in 59 Chinese companies, alleging ties to the Chinese military. And Chinese telecommunications companies, including China Mobile, have been delisted from the US stock exchanges.

The United States added 23 Chinese companies to its economic blacklist on Friday. Of these, 14 were included for their alleged involvement in human rights violations in the Xinjiang region, five for their ties to the Chinese military, and the rest for transactions with companies that had already been sanctioned.

Now, it appears that China’s regulatory crackdown that has lasted for months is also having a chilling effect.

“The strong hand of regulation has deterred investors from investing in Chinese stocks,” said Jack Siu, chief investment officer for Greater China at Credit Suisse. “One of the main topics of discussion within the investment community is when regulatory pressures will ease. The first will likely be the last quarter, but it could extend into the first half of 2022. It won’t not going away anytime soon. “

More than 30 companies are under investigation by various regulatory bodies, and last week, China’s State Administration of Market Regulation announced 22 anti-monopoly fines of 500,000 yuan ($ 77,000) each for have made acquisitions without regulatory approval.

If China wants to exert more pressure on companies destined for the United States, one way to do so would be to tackle so-called “variable interest entities” – the opaque corporate structures that were the main vehicle for Chinese inscriptions abroad.

Using VIEs, Chinese incorporated and licensed companies on land can transfer their profits to an offshore vehicle with shares held by foreign investors. This has allowed Chinese tech companies to bypass foreign ownership controls.

Limiting the use of VIEs could kill IPOs in the United States, where mainland companies have attracted high valuations.

The barrage of regulations has also eroded the growth prospects of the continent’s tech companies, making them less attractive to investors. For example, after its IPO was suspended, Ant was forced to become a financial holding company, subjecting it to capital requirements similar to banks. This requirement and others have reduced its profit outlook and valuation.

“The technology sector is becoming a little less [about] growth and a little more [about] value with slower earnings growth looming, ”said Frank Benzimra, Head of Asia Equity Strategy at Societe Generale. “Some value opportunities will only emerge when the market has indications that the regulatory overhaul has been implemented. But investors should keep in mind [that] a major goal set in the 14th five-year plan in March is to achieve technological independence, which means big tech companies have a big role to play. “

Global investors continue to support Chinese bonds and companies in renewable energy and electric vehicles that promote sustainability. So far this year, inflows in Chinese bonds have amounted to $ 83 billion. Foreign ownership of the country’s bonds hit a record 3.680 billion yuan in May, according to regulatory data.

Investors also bought $ 27 billion net of Chinese stocks through a program that links the Hong Kong, Shanghai and Shenzhen stock exchanges, according to data from the Hong Kong Stock Exchange.

That means the real decoupling is a long way off, according to analysts such as Benzimra and Tianlei Huang, a researcher at the Peterson Institute for International Economics.

“It is difficult to imagine that the tightening of the rules on overseas listing will lead to a significant decline in US holdings of Chinese securities,” Huang said. “Even if obtaining a listing in the United States becomes much more difficult for Chinese companies due to the crackdown, listing in Hong Kong or Shanghai remains a viable option and American investors will still have access to these companies. mainland in both exchanges. “

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