Chinese regulators struck again on Tuesday, making clear they aren’t done with their heightened scrutiny of some of China’s biggest companies and fastest-growing sectors—highlighting the use of data as another front in U.S.-China tensions.
Regulators on Tuesday said they would tighten rules that let Chinese companies list overseas and revise its initial public offerings approval process, potentially halting the possibility of big Chinese IPOs like the one ride-sharing company Didi Global (ticker: DIDI) just completed. That move came after reports that Didi pushed ahead with its IPO even after China’s cybersecurity watchdog suggested it delay the offering.
The iShares MSCI China exchange-traded fund (MCHI) fell 2.3% to $78.72 while the KraneShares CSI China Internet ETF (KWEB) fell 3.8% to $64.22. For investors, the latest moves mean the cloud hanging over the Chinese market—and technology stocks especially—is likely to persist.
Analysts expect China to continue clamping down on companies that may be getting too big or where growth has been too rapid. Indeed, Reuters, citing three people familiar with the matter, reported that Chinese regulators may block a merger between two videogame streaming sites Tencent Holding’s (0700.Hong Kong) DouYu International Holdings (DOYU) and Huya (HUYA).
“We are clearly well into a comprehensive crackdown across Internet sectors that has hit across subsectors,” Gavekal Research’s Arthur Kroeber said. “At a certain point, we have to assume they will have achieved their aims, the rules of the game will be clearer and investors can come back into the water. I think a lot of us underestimated how broad it is.”
While these moves come against the backdrop of rising U.S.-China tensions, Kroeber sees the moves as more about China’s domestic regulation and concerns about its critical infrastructure and data security than geopolitics. “Two things are going on: The technocratic question about governance of data security and supply chain security and how the [Communist] party state gets companies to do what it tells them to do on regulatory compliance things,” Kroeber says. “It’s more about these types of issues than concern about foreign listings.”
But data has a role in U.S-China tensions as another front for strategic competition and national security concerns. TS Lombard’s Rory Green describes the Didi move as the battle for data sovereignty. “Control of data is shaping up to be a major domestic and geopolitical issue, with direct equity market implications for firms operating on both sides of the Pacific,” Green says in a note. “For China it is all about national security. Beijing has a far-reaching ‘data strategy’, as recent moves against Didi, the new Data Security Law, and its national data center plan make clear.”
Increasing scrutiny around data could spread to other U.S.-listed Chinese companies and the heightened compliance requirements, from both China and the U.S., will probably lead to more Chinese tech companies staying at home going forward, adds Winston Ma, adjunct professor at the New York University School of Law and author of “The Digital War—How China’s Tech Power Shapes the Future of AI, Blockchain and Cyberspace.”
Adding to the pressure to stay closer to home is legislation in the U.S. that looks to delist Chinese companies within three years if they aren’t in compliance with U.S. auditing rules. The Securities and Exchange Commission is in charge of implementing the legislation though analysts are mixed on whether the U.S. and China will reach some sort of compromise to avoid delistings.
Already, more Chinese companies have been seeking secondary listings closer to home as U.S.-China tensions frayed—and the Hong Kong Exchanges and Clearing is also making it easier for Chinese companies to do so, speeding up the public offering system and making it easier for Chinese companies to stay closer to home.
“This is a reminder by regulators to Chinese firms listed elsewhere—or thinking about listing elsewhere—that the hand of China regulation stretches out,” says Derek Scissors, a senior fellow at the American Enterprise Institute. Chinese companies with large overseas presence, in the U.S. or Europe, could be targets of heightened scrutiny, Scissors adds.
Most analysts don’t expect China to do away with the variable interest entity structure many large Chinese companies use to list in the U.S., but increasing calls for transparency or disclosures by the U.S. could face pushback from the Chinese.
Increasingly, larger investors have opted for locally-listed stocks over U.S. listings of Chinese companies, like Alibaba Group Holding (BABA). But those local listings are harder for retail investors to access, a reason mutual funds may be a better route for those looking to invest long-term in China.
Write to Reshma Kapadia at [email protected]