IINVESTORS ARE still speculating on what Didi Global, a transit giant, has done to anger Chinese regulators. Some say he has gone madly ahead with his initial public offering of $ 4.4 billion (Initial Public Offering) in New York despite advice from officials to delay registration. Others suggest he stole lightning from the Beijing leadership by launching the exchanges on June 30, the eve of the Chinese Communist Party’s 100th anniversary.
Whatever his sin, Didi now says he plans to retire from New York and re-enroll in Hong Kong. He did not elaborate on his reasoning or answer the moving questions. It’s possible the company was forced out of America by Chinese internet regulators. It’s a fiasco for the firm and its shareholders, like SoftBank, a Japanese investment group (whose share price has fallen 8% since the delisting announcement). It also portends two big changes in how foreign investors will access Chinese stocks in the future.
The first is the end of Chinese Initial Public Offerings in America. Not so long ago, the US stock exchanges were the number one destination for ambitious Chinese companies. Alibaba, an e-commerce giant that went public in New York in 2014, remains the largest American Initial Public Offering in history. Didi was part of a recent wave of Chinese darlings eager to tap America’s deep capital markets. Some 248 Chinese groups with a combined market capitalization of $ 2.1 billion were trading in New York in early October.
These listings have already been threatened by US rules which require all listed companies to provide access to internal audit documents or be excluded from stock exchanges. Chinese companies cannot easily comply with them because officials in their home country consider these documents to be “state secrets.” The dilemma dates back a decade, but a law put into practice by the Securities and Exchange Commission on December 2 will purge all non-compliant companies from U.S. stock exchanges by 2024. This could have potentially painful consequences for some investors.
Many remained hopeful of a possible deal between US and Chinese regulators that would revive a once-booming cross-border listing business. However, the suggestion that Chinese regulators were behind Didi’s deregistration – an unprecedented foreign government intervention in the US market – makes a deal much more difficult to strike, says Jesse Fried of Harvard Law School. .
A second change is the reorientation of capital flows to Chinese markets. Didi has been one of many Chinese tech groups in recent months to face tough regulations. The campaign, which targeted almost exclusively overseas listed companies, has wiped out some $ 1.5 billion in shareholder value since February. Yet at the same time, the Chinese stock markets have seen a boon. In particular, foreign holdings of Chinese stocks and bonds on the mainland nearly doubled between early 2019 and September this year, reaching around $ 1.1 billion (see chart).
The reallocation is mainly the result of two forces. One is the inclusion of Chinese stocks and bonds in global indices, which means index funds must own them. Another is the fact that mainland exchanges host few battered online groups, most of which have American or Hong Kong listings. As a result, stocks listed in Shanghai and Shenzhen are less exposed to regulatory anger and more diversified, notes Alicia Garcia Herrero of Natixis, a bank. This makes them particularly attractive this year. As more and more Chinese companies follow Didi from America to Hong Kong, or move to the mainland, even more capital could flow into China.
Many foreign investors expect listed companies in China to be more attuned to its rapidly changing regulatory environment, says Louis Luo of ABRDN, an asset manager. And despite their willingness to crush overseas-listed tech groups, the authorities are much more susceptible to domestic market turmoil given the high level of investment in ordinary household retailing. It’s hard to imagine regulators crashing the share price of a locally listed group like Didi did. On the contrary, companies facing regulatory challenges will now have to sort them out before registering in China. Chinese officials have long hoped their corporate darlings would register closer to home. They make their wish come true. ■
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This article appeared in the Business section of the paper edition under the title “The great reassignment”