Didi’s delisting sounds the death knell for Chinese IPOs in America

FEW BLOCKBUSTER public share sales have been as tortured as Didi Global’s. Within four days of raising $4.4bn in New York in June the Chinese ride-hailing group was hit with an investigation by the authorities in its home market and its mobile application was dropped from app stores in China, preventing new customers from using it. The firm’s share price remained above its initial public offering (IPO) price for just three trading days and has since fallen by more than 40%. Now the company, which was once valued at $70bn and backed by Japanese investment firm SoftBank, says it will delist from American exchanges altogether and relist in Hong Kong.

Investors should consider Didi’s exit a death knell for Chinese IPOs in America. Some $1.5trn of Chinese company shares trade in New York. Those listings have already been threatened by American regulations that require all listed companies to provide access to internal auditing documents or face eventual delisting. Chinese officials have refused to allow access, often deeming this material “state secrets”. The dilemma goes back a decade but recent American legislation, which was adopted by the Securities and Exchange Commission on December 2nd, will purge all non-compliant companies from exchanges within two to three years, with potentially devastating consequences for some investors.

Many have held out hope for an eventual agreement between American and Chinese regulators that would revive a once-booming cross-border listing business. Not long ago American exchanges were the leading destination for the IPOs of Chinese tech groups such as e-commerce giant Alibaba and online services group NetEase. Didi has not commented on why it plans to leave the New York Stock Exchange for Hong Kong but the group has been under intense regulatory pressure from the Chinese government since its IPO, ostensibly over data-security concerns. Several news agencies have reported that the Cyberspace Administration of China (CAC), an increasingly powerful regulatory body, has pushed the company to delist.

Such action—an unprecedented intervention by a foreign government in the American market—would make an agreement between America and China far more difficult to strike, says Jesse Fried of Harvard Law School. “Didi’s exit will thus be a preview of what is to come,” he says.

China’s growing regulatory reach should also raise alarms for global investors. Until now no Chinese enforcement body has sought to control Chinese listings in foreign markets. But new rules give the CAC authority to vet most overseas Chinese tech IPOs. These rules may also apply to share sales in Hong Kong. On December 1st the China Securities Regulatory Commission (CSRC) denied reports that it plans to ban the use of variable interest entities (VIEs), an offshore holding-company structure that has allowed Chinese companies to skirt local regulations barring foreign investments in some types of businesses. Yet Chinese media have reported that regulators are planning to revamp rules on VIEs, indicating tighter control over foreign listings.

China’s leadership wants more control over who can invest in the country’s tech groups, and who gets access to the data collected by those companies. Didi’s case shows they have few qualms about severing long-standing connections between those companies and Wall Street.■

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