The Chinese technology sector is being crushed by both the American and Chinese regulators, which may leave some – like Didi – with nowhere to go.
This has been triggered by the latest calamity at Didi, which is trying to delist from the US and relist in Hong Kong but instead of welcoming the prodigal son home, the Chinese state has slammed the door in its face.
The Cyberspace Administration of China (CAC) has told Didi that its proposals to make data security policies compliant with the Chinese rules for overseas listings. This has meant that the Hong Kong listing is now indefinitely stalled which caused the share price to tank 44% in the US.
The idea of this regulation is to prevent data that is considered important to Chinese national security (like where its citizens are) from falling into foreign hands, but for almost all Chinese companies listed overseas, this idea is absurd.
This is because although the shares are listed overseas, the operations and the customers are all in China which means that all of the data that is generated stays in China and goes nowhere else.
The only real overseas operation that Didi has is a financial contract with an overseas entity (which is listed) that enables that entity to mirror the performance of Didi. This is the infamous variable interest entity (VIE). This contract has nothing whatsoever to do with data or data management and so the notion that Didi needs extra scrutiny on data security because of this rather than being listed at home is absurd.
However, this is not really about data security but instead making sure that Chinese companies do what they are told by the state, and here Didi is in very hot water.
Right before its IPO, the CAC raised concerns and asked the company to delay its listing, but Didi went ahead anyway causing the Chinese state to lose face in its opinion. Hence, Didi has to be punished for having the temerity to defy the Chinese state ,and I have long thought that this punishment will be extracted in very heavy coin.
To make matters worse, the state now has an incentive to put Didi out of business entirely, as it has pumped $591 million into one of its rivals waiting to take over should Didi fail.
As a result of this punishment, it is unable to list in Hong Kong, and with the US no longer very keen to host it on the NYSE, Didi may soon find itself homeless.
One option is to relist in Shanghai or Shenzhen, but then only local investors will be able to buy it, meaning that there will be an even greater wave of selling as those holding shares of the overseas entity sell out.
Didi is not alone in feeling this pain, as many of the other Chinese companies that are listed in the US are feeling regulatory heat and are considering delisting from the US to relocate to Hong Kong.
Alibaba has been hit just like the others, despite the fact that the regulatory shadow has largely passed it by and the fact that it already has a Hong Kong listing. Trading volumes are already migrating over to Hong Kong, and I think that Alibaba will eventually delist from the US. However, the shares are trading as if it was being delisted in the US with nowhere to go and with no outlook for a recovery.
The Chinese technology sector is also being pummelled as the centre of its tech universe; Shenzhen is plunged into a COVID-zero lockdown. The Chinese obsession with COVID-zero is damaging the economy but sooner or later, China will be forced to live with COVID just like everyone else. That will be the catalyst for a recovery in both the economy and the tech sector but for now, sentiment continues to be awful as the sector is being squeezed by both the US and China.
Alibaba has more than halved since I bought it, but the fundamentals have only deteriorated slightly. Hence, it is rapidly becoming time to consider whether to double the position given how low the valuation has fallen.
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