Things are looking pretty dire for Chinese tech right now, especially firms that have been considering overseas listings as a way to raise money. The chill created by tensions, both within China’s borders and with its greatest rival, could bring overseas investment in Chinese tech to a grinding halt.
Investors are already rattled. China’s unprecedented tech crackdown has wiped $1 trillion off the value of overseas-listed Chinese tech stocks since February — one of the worst sell-offs in history, Goldman Sachs analysts said in a research report last week.
And since shares in Didi crashed this month after its IPO in New York — a result of the massive scrutiny the ride-hailing company has faced from Chinese regulators and American lawmakers — a wave of other Chinese firms have reportedly backed off of plans to go public in the United States.
It “may very well be” the end — at least temporarily — to US listings for Chinese companies, according to Doug Guthrie, a professor and director of China Initiatives at Arizona State University’s Thunderbird School of Global Management. He added that a “serious pause” on such listings could be in effect until US-China relations improve.
“The Chinese government is sending a very clear signal to Chinese tech firms and to the rest of the world, that Chinese organizations must work in lock-step with the Chinese government,” Guthrie said. “Companies that have grown too big and global too quickly will be reined in to ensure that they are working together with the Chinese government’s priorities. “
There are still ways for Chinese companies to tap overseas investment even if the United States is no longer an option. They can go to Hong Kong, for example, which also has a diverse pool of international investors and a regulatory regime that meets international standards and allows free flow of capital and information.
But the US market still has an irreplaceable role, as it’s bigger than any other financial market in the world, has a greater turnover in stocks and places a higher value on company earnings. That means a company listing in the United States may find it easier to achieve a higher valuation and sell more shares
Pressure from both sides
Beijing’s sweeping tech crackdown has rocked firms from Alibaba and Ant Group to Meituan and Pinduoduo. And its efforts to control the sector spread even further this month.
The Cyberspace Administration of China — a powerful internet watchdog with Chinese Community Party links that trace all the way up to President Xi Jinping — banned Didi from app stores days after its initial public offering.
The CAC, which has accused Didi of illegally collecting and using personal information, also joined several other government agencies, including ministries in charge of public and state security, in visiting the Beijing-based company to review its cybersecurity.
The watchdog, whose influence has ballooned since Xi set the agency up in 2014, is also setting its sights on curtailing overseas listings. It recently proposed that any company with data on more than one million users must seek the agency’s approval before listing its shares overseas.
“Financial officials previously tolerated their loss of regulatory control with overseas listings in order to provide firms with more opportunities to raise capital,” analysts at Eurasia Group wrote in a report earlier this month. “But the overall calculus has clearly shifted in favor of prioritizing national security concerns.”
“There is also a very real possibility that the US moves to restrict new listings by Chinese firms,” the analysts said, suggesting that such an action could come from either the SEC or Congress.
A tenuous financial relationship
Tensions between the United States and China have intensified in recent years over issues ranging from tech and trade to Covid-19, Hong Kong and Xinjiang.
But even as Washington blacklists Chinese companies and bars them from accessing US technology or investment, money has still been flowing into China.
So far this year, 37 Chinese companies have listed in the United States, raising a combined $12.6 billion, according to Dealogic. That’s the highest amount for the period on record since 1995.
US investors now hold about $1 trillion in Chinese stocks. That includes about $590 billion worth of exposure in Hong Kong, $330 billion in the United States, and $135 billion in mainland China, according to a recent estimate by Goldman Sachs.
Beijing’s recent clampdown and the tensions with Washington, though, have already lead to a shift.
“Irrespective of the politics, US and Chinese regulators are now demanding higher transparency and more accountability from Chinese [American Depositary Receipts],” said Qi Wang, CEO of MegaTrust Investment (Hong Kong), a Chinese fund management firm.
“Companies may face two sets of different or even opposing standards,” he said, referring to regulatory demands in each country. “The legal and compliance challenges [of Chinese IPOs] will only increase from here.”
Global mutual funds are underweight on Chinese equities, according to the Goldman Sachs analysts, who added that hedge funds have also reduced their exposure to Chinese stocks to the lightest in two years.
Goldman estimated that China’s digital economy accounts for 40% of the country’s GDP, and that the tech sector represented some 40% of the MSCI China Index, which is widely followed by global equity investors as a major benchmark.