Chinese Government Pressure Forces Investors To Sell Tech Stocks

Shares in Chinese taxi service Didi Global dropped nearly 20% on Tuesday in the fourth day after their NYSE IPO after the company stopped registering new users on its app and Chinese authorities ordered it to be removed from app stores due to illegal collection of user data. … China’s tech stocks fell.

On Tuesday, investors in China’s tech companies were once again convinced that the country’s authorities are tightening control over the tech sector and, in particular, Chinese companies, whose shares are traded on the US stock exchanges.

The Chinese Cabinet of Ministers said that under the new rules, the country’s regulators will improve the regulation of cross-border user data flows and security, combat illegal activity in the securities market, and punish fraudulent securities issuance, market manipulation and insider trading. China will also check the sources of financing for investment in securities.

Didi Global (DIDI) taxi service, whose $ 4.4 billion IPO took place on June 30 on the NYSE, was the latest major casualty of regulatory tightening in China.

After the Cyberspace Administration of China CAC ordered the removal of the company’s app from app stores in the country, Ant’s Alipay (partly owned by Aibaba) and Tencent’s Wechat followed the order. Didi had to stop registering new users on their app.

Didi’s shares plummeted, causing many NYSE investors to suffer losses. While it is unclear how long the blocking of Didi’s app will last, Chinese authorities are investigating the company’s cybersecurity activities.

Chinese companies Full Truck Alliance (YMM) and Kanzhun Ltd (BZ), which also recently began trading on US exchanges, tumbled on Tuesday after CAC announced a cybersecurity investigation of their subsidiaries on Monday.

In the chart below, Didi’s shares are falling in blue, Full Truck Alliance (YMM) in orange and Kanzhun Ltd (BZ) in blue since their US listing.

Shares of China’s tech giants also declined amid the news as investors worried about the impact of regulatory pressures. Shares of Alibaba (BABA), Baidu (BIDU) and JD.Com (JD) fell 2.8%, 5% and 5%, respectively, on Tuesday, exacerbating their declines since early 2021.

Rory Greene, a Chinese economist at TS Lombard, an investment research firm, said the move by the Chinese authorities reflects “that governments around the world recognize the importance of large amounts of user data and the need to regulate it.”

The number of Chinese companies registered in the US has grown by 14% in the past seven months, even as diplomatic relations between Washington and Beijing remain at their lowest level in decades.

According to Refinitiv, China accounted for a third of all global IPO proceeds in the first half of 2021, the highest share of any country.

Earlier in March, the Securities and Exchange Commission (SEC) announced new rules to exclude foreign companies from listing on US stock exchanges if they fail to comply with the country’s auditing standards for three years.

According to a report by the US-China Economic and Security Review Commission, from October 2020 to May 2021, 17 Chinese companies were expelled from the US exchanges for various violations.

Some market analysts see the current drop as an opportunity to buy Chinese stocks at a lower price due to the higher risk associated with uncertainty and new rules.

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